Unveiling TiE Angels' Startup Selection Process: An Insider's Look

In this article, I will dive deeper into how TiE Global Angels (and their South Californian branch - TiE SoCal Angels) screen and evaluate startups.

The angel group follows a comprehensive process of evaluating a startup to make informed investment decisions. This article will outline the various stages involved in the process and how TiE Angels organize a monthly startup pitch event to allow entrepreneurs to present their business ideas and receive feedback from experienced investors.

Importance of Evaluation

Evaluating a startup is an essential step for angel investors as it helps them to determine the potential risks and opportunities of the startup. By thoroughly assessing the startup's strengths and weaknesses, investors can gain a better understanding of the startup's overall potential for success. The evaluation process involves several stages: screening, due diligence, valuation, investment terms, and post-investment.

1. Screening

The first stage in the evaluation process is screening. The initial step is to screen the startup's pitch deck or business plan to determine if it aligns with the investor's investment goals and criteria. If the startup's pitch deck or business plan meets the requirements, it proceeds to the next stage.

At TiE SoCal Angels, a monthly pitch event is organized - every third Wednesday. Interested Startup Founders apply at the website - www.TiESoCalAngels.com. A handful of Startups are chosen, and they pitch in front of decision-making members.

Once the startup passes the screening stage, the investors will conduct due diligence on the company. The due diligence involves reviewing the company's financials, management team, industry trends, competition, legal structure, intellectual property, and other critical factors that may impact the startup's success. This stage helps the investors thoroughly assess the startup's potential and risks.

The startup screening process is a critical step in identifying promising investment opportunities and is typically conducted by angel investors or venture capitalists. The process involves evaluating startups based on various criteria to determine their potential for success and profitability. Here are the steps involved in a typical startup screening process:

• Initial Screening

The first step in the screening process involves reviewing the startups' pitch decks or executive summaries to understand their business model, market size, and growth potential. This step helps investors filter out startups that do not align with their investment criteria or do not have the potential for significant growth.

• Business Plan Review

Once a startup has passed the initial screening, investors will review its business plan in detail. The business plan should include a clear mission statement, a description of the product or service, a market analysis, a marketing plan, financial projections, and details on the management team. Investors will assess the viability of the business model and its potential for growth and profitability.

• Financial Projections

Investors will review the startup's financial projections to evaluate its potential for growth and profitability. The projections should include revenue estimates, cost projections, EBITDA, and cash flow forecasts. Investors will assess the startup's financial assumptions, such as revenue growth rates and customer acquisition costs, to determine the feasibility of the projections.

• Management Team

Investors will evaluate the startup's management team to assess their experience, qualifications, and track record. The management team's ability to execute the business plan and navigate challenges is critical to the startup's potential for success. Investors will also look for a diverse and complementary skill set among the team members.

2. Due Diligence

Due diligence is the process of reviewing and investigating a business or investment opportunity before deciding to proceed with it. Due diligence aims to gather and assess all relevant information and data to evaluate the potential risks and opportunities associated with the investment opportunity. 

For example, let's say that an investor is considering investing in a startup company that develops software for the healthcare industry. The investor would conduct due diligence on the startup to evaluate its potential as an investment opportunity.

The due diligence process would involve reviewing the company's financial statements, such as its income statement, balance sheet, and cash flow statement, to understand the company's financial health and growth potential. The investor will also review the startup's business plan, marketing strategy, and revenue projections to determine if the company has a solid plan for growth and profitability.

In addition to financial and strategic analysis, the investor would research the healthcare industry and the startup's competitors to evaluate the company's competitive position. The investor would also assess the startup's management team, including their experience, qualifications, and track record, to assess their ability to execute the business plan.

During the due diligence process, the investor would also review any legal documents related to the investment, such as the startup's organizational documents, contracts, and intellectual property rights, to ensure that the investment is legally sound and protected.

Overall, the due diligence process allows the investor to gain a comprehensive understanding of the startup's potential risks and opportunities and make an informed investment decision.

3. Valuation

After conducting due diligence, the investors will assess the startup's valuation. Valuation involves determining the company's worth based on factors such as revenue, market size, growth potential, and industry trends. The startup's valuation determines how much investment the startup will receive in exchange for the equity stake.

How is the valuation of a Startup determined?

The valuation of a startup is a critical factor in determining the equity stake investors will receive in exchange for their investment. Startups typically have limited operating history, making it challenging to assess their worth. However, there are several ways to evaluate a startup's valuation, including the following:

• Comparable Analysis

The comparable analysis is a standard valuation method that involves comparing a startup to other similar companies in the same industry. This approach is often used when startups are in the early stages of development and have limited financial data available. The valuation is based on the market value of comparable companies, adjusted for differences in size, growth potential, and other relevant factors.

For example, if a startup is developing a mobile app for the education sector, the investor could look at other startups in the same industry that have developed similar products. Suppose the comparable companies have been valued at an average of $10 million. In that case, the investor could use this average value as a benchmark and adjust it based on the differences between the comparable companies and the startup in question.

•  Discounted Cash Flow (DCF) Analysis

The discounted cash flow analysis method involves projecting the startup's future cash flows and discounting them back to their present value using a discount rate. The discount rate is typically the investor's required return rate or capital cost.

For example, suppose a startup is projected to generate $1 million in annual cash flows for the next five years, with a required rate of return of 10%. In that case, the present value of the cash flows would be $3.79 million.

•  Venture Capital (VC) Method

The VC method is a valuation technique commonly used by venture capitalists to determine the startup's pre-money valuation. The VC method involves estimating the startup's terminal value, which is the company's value at a future point in time, typically five to seven years in the future. The terminal value is then discounted back to the present value using a discount rate.

For example, suppose a startup is projected to generate $10 million in revenue in five years with an estimated profit margin of 20%. Using a conservative multiple of 3x to 5x, the terminal value of the startup would be estimated at $30 million to $50 million. If the investor's required rate of return is 20%, the pre-money valuation of the startup would be between $10 million to $16 million.

Valuing a startup is not an exact science, and there are various methods available to investors. It's important to consider the startup's stage of development, growth potential, industry, and other relevant factors when determining its valuation. Investors at TiE Angels and TiE SoCal Angels use a combination of the methods mentioned above and make informed investment decisions.

4. Investment Terms

Once the startup's valuation is determined, the investors will negotiate the investment terms. The investment terms include the amount of funding, equity stake, board seat, and any other investment conditions. The negotiation of the investment terms ensures that the investors and entrepreneurs have a clear understanding of the investment deal.

Investment terms refer to the conditions and requirements that investors and startups agree upon when a startup receives funding. These terms vary depending on the type of investment, the stage of the startup, and the preferences of the investors. However, some common investment terms include the following:

• Equity

Equity is the ownership interest that investors receive in exchange for their investment. The percentage of equity that investors receive is based on the startup's valuation and the amount of funding provided. Equity investors typically have a right to vote on major decisions, such as the appointment of directors and the sale of the company.

• Convertible Notes

Convertible notes are a type of debt that can be converted into equity at a future date. Convertible notes typically have a maturity date, an interest rate, and a conversion price. The conversion price is the price at which the note converts into equity, and it is usually based on a discount from the next funding round or a predetermined valuation cap.

• Preferred Stock

Preferred stock is a type of equity that has preferential treatment over common stock. Preferred stockholders typically have a right to receive dividends before common stockholders and have a higher priority in the event of a liquidation. Preferred stock can also have conversion rights, allowing investors to convert their shares into common stock at a predetermined price.

• Anti-Dilution Provisions

Anti-dilution provisions are designed to protect investors from the dilution of their equity ownership in the event of a subsequent funding round at a lower valuation. There are two types of anti-dilution provisions: full ratchet and weighted average. Full ratchet provisions provide the most protection to investors by adjusting the conversion price of their equity to the current valuation, while weighted average provisions adjust the conversion price based on the amount and price of the new funding.

• Liquidation Preferences

Liquidation preferences determine the order in which investors are paid in the event of a liquidation or sale of the company. Investors with a liquidation preference receive a specific multiple of their investment before common shareholders receive any proceeds.

In conclusion, investment terms can vary depending on the type of investment, the stage of the startup, and the preferences of the investors. It's essential to understand the different investment terms and how they can impact the investor's return and the startup's growth. Entrepreneurs should carefully review and negotiate investment terms to ensure that they align with their long-term goals and objectives.

Conclusion

TiE Angels and TiE SoCal Angels have a rigorous screening process that evaluates startups on various parameters, including their team, product, market opportunity, competition, and financial projections. Through their monthly pitch events and other networking opportunities, they provide a platform for entrepreneurs to showcase their startups and connect with potential investors.

Once a startup has successfully completed the screening process and received funding from TiE Angels or TiE SoCal Angels, they can benefit from the extensive network of mentors, advisors, and industry experts associated with TiE. These resources can help startups accelerate their growth, refine their business strategy, and navigate the challenges of building a successful company.

And speaking about events and fundraising here is another great opportunity:

TiE Global Angels Investor Summit

TiE Global Angels Investor Summit (in association with TiE SoCal Angels) is one of the largest gatherings of venture capitalists, angels, family offices, and individual investors on the West Coast of the United States. You can sign up with the Discount code LUKE5 here:

WHY ATTEND?

This event will be the hotbed for Networking, Discussing Trends & Deal-making.

Held at the prestigious Sheraton, Cerritos, this event is a must-attend event for investors as well as startups looking to build long-lasting relationships in the Southern California ecosystem. The last few years of this event were well received by Startups and Investors alike and the event attracted 550+ attendees overall. This year, the event is going to be even bigger and better.

• Thursday, April 6, 2023 – 8:30 AM to 5:30 PM
• Sheraton, Cerritos, CA 90703

200+ Investors are expected to attend the event this year including venture capital firms, angel investors, family offices, and individual investors.

All investors are screened prior to receiving admission. Fewer than 100 startups are issued tickets for admission, 25 startup tables are available and only 12 companies will be allowed to pitch.

WHO SHOULD ATTEND?

Startups from the following industries: Fin-Tech, Bio-Tech, AI/ML, Big Data, Cyber Security, Cannabis, Blockchain, Health and Wellness, Media/Entertainment, Gaming, CPG, and Enterprise Software

SUMMIT PROGRAM & FEATURES

- Access to funding resources

- Present your business ideas to investors

- Virtual profile with Videos

- Business Networking To Maximize Exposure

INVESTORS

If you are part of the startup ecosystem, this event is where you can get the pulse of the industry. Spend a day with the most prominent investors from Southern California talking about trends, deals, and plans for the future. We will have a curated list of startups that match your investment criteria available for you. The profiles will be available a week before the event so you will know exactly who will be in the room.

Get your pitching ticket with a 5% discount by using the code LUKE5 and the following link:

TiE Global Angels Investor Summit 2023

#startups #investors #summity #events #SoCal #angelInvestors

Post by Lachezar Zanev (Luke), Ambassador at TiE SoCal Angel

Join my Founders & Funders Discord server called Venture Network below:

Email me at: [email protected]