by Mehr Sokhanda
Angel investing plays a crucial role in fueling innovation and supporting early-stage startups. However, navigating the complex world of startup investments can be challenging, even for experienced investors.
At a recent Brampton Angels event, Moien Giashi, Principal at GreenSky Ventures, shared valuable insights on angel investing and venture capital. His presentation covered the fundamentals of investing in startups, from understanding the fundraising landscape to conducting due diligence.
Moien Giashi has been with GreenSky Ventures for four years and, as a principal, leads the firm’s deep tech investments. GreenSky invests at the seed stage with cheque sizes between $1.5 million and $2 million, focusing on companies within Canada. Overall, the fund is generalist, with investments in B2B enterprise SaaS and deep tech.
The Startup Funding Landscape
Giashi outlined the various funding options available to startups. These range from non-dilutive sources like grants and subsidies to dilutive options such as angel investments, venture capital, and crowdfunding. He emphasized that each funding type has its pros and cons, and startups often use a combination of these sources throughout their growth journey. This diverse funding landscape allows companies to choose the most appropriate financing options based on their current needs and stage of development.
Startups often prefer non-dilutive options like grants and subsidies as they don’t reduce the founders’ ownership stake. More often than not, founders, through bootstrapping, rely on their own capital to push the business forward. When it comes to dilutive funding, Giashi outlined a progression from friends and family investments to angel investors and venture capital.
Giashi pointed to the critical characteristic distinctions on the different investor types, “When you’re dealing with friends and family, it is less formal. Checks are smaller and they invest because they like you. They don’t necessarily understand what you’re doing as a startup, and they’re very quick in decision making.” This process becomes more challenging when the founder moves on to angel investors, who are typically accredited individuals with industry experience and have larger check sizes. Angels will do more due diligence and as Giashi stresses, “This is the angel’s money– they don’t have to respond to anyone. It’s their decision.” What eases the investment decision is the expertise and industry knowledge angel investors bring to the table.
After angel investors, the next level, the venture capitalists, invest a minimum cheque size of $250,000 and operate on an even larger scale with more stringent processes. Venture capital operates at the seed stage and growth stages towards IPO. As per Giashi, firms that operate at this level can invest at levels of $50 million, $100 million and higher. This stage is highly regulated as the company manages a fund(s) where investors comprise of many limited partners (LPs). The due diligence process, therefore, is much longer than angel investors’, to ensure risk/return is properly managed.
Understanding these differences is crucial for investors as it helps them identify their role in the funding ecosystem and the level of commitment, expertise, and resources they need to bring to the table.
Giashi also observed the various stages of fundraising, from pre-seed to growth stages, and how they correlate with different investor types. He explained that early stage rounds typically involve smaller amounts and lower valuations, stating, “Round sizes at early stages are typically small, ranging from $200K to $2 million. Valuations are also lower, usually under $10 million. However, there are always exceptions to these general guidelines.”
He stressed the importance of understanding the unique dynamics of startup investing. Unlike traditional investments, startup portfolios often follow a power law distribution. He explained, “It’s a game of home runs. In a portfolio of 25 to 30 companies, 20 to 25 might fail completely. The key is finding that one outlier investment that not only makes up for the losses but also drives the majority of your returns.” This reality shows the need for diversification and the acceptance that many investments may not pan out.
Portfolio Strategy and Follow-On Investments
He advised investors to carefully consider their portfolio strategy, recommending that they set aside a portion of funds for follow-on investments in promising companies. This approach allows investors to double down on their most successful bets and potentially increase their returns. He suggested that investors might allocate 40-60% of their total investment budget for follow-on rounds, similar to how venture capital firms structure their funds. He explained, “It’s not just about writing a $25K check and moving on. Once you’ve invested and see the company grow, you have the option to exercise your pro rata or invest more to help ensure a return.”
The Importance of Due Diligence
Due Diligence is, by far, the most significant process in the investing cycle. Giashi emphasized that this process is crucial for understanding the business, identifying potential risks, and making sound investment decisions. “Without thorough due diligence, you’re not understanding the business or its competitive landscape. Skipping this crucial step leads to emotional rather than informed investment decisions,” he cautioned. He elaborates that when making sound investment decisions, one needs a deeper understanding of the business, its competitors, and needs to verify key claims, particularly around intellectual property. As the Giashi notes, “One of the key aspects of due diligence is confirming the company’s intellectual property claims and ensuring they have the freedom to operate without legal hindrances such as cease-and-desist letters or lawsuits.”
He outlined several key areas of due diligence, including
- legal due diligence to ensure proper intellectual property rights and no outstanding legal issues;
- technical due diligence to understand the product architecture and development roadmap;
- financial due diligence to review the company’s projections and historical performance; and market due diligence to analyze the competitive landscape and market potential.
In this sense, Giashi emphasized the importance of having a clear investment thesis and established criteria when screening potential investments. Investors need to consider key questions about the company’s problem, solution, timing in the market, and traction to ensure it aligns with their thesis. It’s also crucial to establish ground rules and deal breakers, such as scalability or return potential, to avoid investments that don’t meet specific goals. He notes: “You need to have a clear plan when evaluating a company. A business with a 3-5X revenue multiple might be ideal for someone seeking a higher stake and more reliable returns, but it could be a poor fit for an investor aiming to invest in higher-tech companies for 100X returns and larger-scale opportunities,” showing that investors need to be clear about their goals and risk tolerance.
Giashi stressed the importance of adapting the due diligence process to the stage of the company. For early-stage startups, he noted, “The product may still be at the MVP stage and not fully developed. And you may not have the time or expertise to dive into the code and evaluate it thoroughly.” Instead, he recommends focusing on high-level architectural understanding: “Focus on what goes in, what comes out, what is the intellectual property, just to make sure that we can underwrite the risk associated with the technology.”
One important aspect of due diligence that Giashi highlighted is the importance of a well-organized data room. “This is one of the items that you always ask the company to provide,” he explained. A proper data room should lay out all the relevant information about the company. However, Giashi indicated that at earlier stages, a company might not have everything laid out clearly. “You might not even have incorporated the company when you first invested as an Angel. But you definitely want them to have their minute books, their legal documents, and their cap table ready.”
Investment Structures and Term Sheets
Giashi also explained the various investment structures, including priced equity rounds, convertible notes, and Simple Agreements for Future Equity (SAFEs).
- Priced Equity Rounds: These are traditional investment rounds where a company sells shares at a set price, based on an agreed-upon valuation.
- Convertible Notes: These are short-term debt instruments that convert to equity at a later date, usually during the next priced round.
- Simple Agreements for Future Equity (SAFEs): These are investment instruments that give investors the right to receive equity in a startup at a future date when certain triggering events occur, typically during the next priced funding round
The choice of funding vehicle can significantly impact future rounds and investor rights. SAFEs have become increasingly popular for early-stage investments due to their simplicity. Typically, you may see smaller individual check sizes of $5,000, for example, from 20 investors towards a SAFE. As per Giashi, this works well in the US; according to Carta, adoption of SAFEs is as high as 80% in earlier rounds. The SAFE can become a very useful vehicle to exert your rights as an investor. However, he cautioned investors to pay attention to the terms of these agreements, particularly when it comes to valuation caps and discount rates. He noted that standard SAFEs typically offer a 20% discount, which may not be sufficient in a high-risk environment. He advised: “As a group, you have more power to exert when it comes to negotiation. This collective strength can be particularly valuable when introducing specific terms to the term sheet.”
The Critical Role of the Founding Team
When evaluating potential investments, Giashi stated the importance of the founding team. He shared a saying from his team: “A mediocre team with amazing technology is nowhere near an amazing team with mediocre technology,” highlighting the importance of backing strong founders who can execute on their vision and adapt to challenges along the way.
He stressed the importance of having a well-rounded founding team with complementary skills. “We don’t want to be in a situation where you’re missing key roles like a CTO, or someone with regulatory or sales experience,” Giashi said. At the seed stage, when GreenSky typically invests, he emphasized that they expect the core team to already be in place.
However, Giashi also acknowledged that the assessment of the founding team isn’t always black and white. “At the earlier stage, you need to be more flexible and spend time working with the founders,” he said. “If a team has the right pieces in place, that’s ideal. If they have gaps but it seems workable, that’s fine too. But if key roles are missing and it’s not fixable, don’t assume you can invest and then step in to solve it later. It’s often very difficult to deal with such situations.”
Exit Strategies and Value Creation
Giashi discussed the various exit options for startup investments, including acquisitions, initial public offerings (IPOs), and secondary sales. He noted that in the current market, acquisitions are more common than IPOs for most startups. Regarding exit strategies, he advised: ” We prefer companies that have a clear vision of potential acquirers or understand the acquisition landscape in their specific market. “ He also stressed the importance of having experienced advisors who can guide founders through the exit process, as many first-time entrepreneurs may not have the expertise to navigate complex M&A transactions.
Having a clear exit strategy is also key, though Giashi acknowledged it’s often challenging for early-stage companies. “We love when companies have some idea of potential buyers or acquisition possibilities in their market, even if it’s an IPO,” he said. However, many early-stage founders lack a developed exit plan, as he states “Most companies we see at this stage have no idea about exits—how they happen, who to talk to, or how to manage the process.” He highlighted the value of experienced investors and advisors, “Having someone to coach and support the CEO is crucial, especially for first-time CEOs who haven’t been through it before.”
Giashi also touched on the evolving landscape of exits, noting that while IPOs are less common, there are other options emerging. He mentioned that secondary sales and share swaps with acquiring companies are becoming more prevalent. The strategy for exiting, he emphasized, often depends on the specific deal, the stage of the company, and the potential of the market.
Giashi offered a comprehensive overview of the startup investing process, from initial screening to exit strategies. His insights underscore the need for a thoughtful, disciplined approach. For aspiring angel investors, the key takeaways include:
- understanding the power law dynamics of startup investing,
- building a diversified portfolio,
- allocating funds for follow-on investments,
- conducting thorough due diligence,
- paying close attention to investment terms,
- focusing on the strength of the founding team,
- considering potential exit strategies from the outset,
- and developing a clear investment thesis while avoiding short-term hype cycles.
Join our dynamic community of like-minded individuals who are actively involved in funding and mentoring promising entrepreneurs. For more information on how to become an investor with our angel investment community, read more here.
