How to Start Angel Investing Part #2

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You Get Allocation in a Deal Now What?

In How to Start to Angel Invest Part 1 I jumped into the basics of getting started with syndicates and the world of SPVs. Now that you’ve got your foot in the door, you might be asking: “I’ve got allocation in a deal — what do I do next?”

This is where the real work begins.

Understand the Valuation

One of the first things you should pay attention to when looking at a new deal is the valuation.

Valuations set the stage for your potential returns. Based on Carta’s Q2 2024 data, here’s a quick reference for average valuations based on stage:

• Seed Stage: $15M.

• Series A: $40M.

• Series B: $116.3M.

• Series C: $214.8M.

But don’t just take these numbers at face value. It would help if you compared the startup’s valuation to its peers, considering its stage, traction, and market potential. Also, the industry the company is operating in is very important as well.

Ask yourself: Does this valuation make sense given the company’s current position and future potential?

Assess the Founder-Market Fit

Founder-market fit is critical.

Does the founder have experience or a unique insight into the problem they’re solving? For instance, if a founder is building a fintech startup but has a background in consumer goods, you might want to dig deeper into why they’re the right person for this challenge.

Strong founder-market fit often translates into a better chance of success. Look for founders who live and breathe the problem they’re solving—those are the ones who will push through the inevitable obstacles. Look at the founder’s background and try to get a better understanding of why they started building in that industry, and why they are fit to solve the problem.

FMF is often ignored but one of the most important things you can try to understand.

Evaluate the Product-Market Fit (PMF)

Product-market fit is the holy grail of startups. Does the product solve a real problem for a large enough audience? How is the product resonating with its target market?

One way to gauge PMF is by looking at customer feedback, churn rates, and repeat usage. If the product has a small but passionate user base, that’s a good sign the startup is onto something.

Obviously this is harder in a pre-seed or even seed-stage company. Sometimes all you have is a pitch deck and if you are lucky an MVP. But if they have an MVP or even a Demo, try the product out, ask to speak to customers, and see if they have been able to get feedback early.

Total Addressable Market (TAM)

Understanding the Total Addressable Market (TAM) is crucial. TAM gives you an idea of the startup’s potential scale. Is the market large enough to support the startup’s growth ambitions?

In short, TAM is the total revenue opportunity available if a product or service were to achieve 100% market share. In simpler terms, it gives you an idea of the startup’s potential scale. Does it offer the runway for exponential growth, or is it a more niche market with limited expansion opportunities?

How to Calculate TAM

Calculating TAM involves a few steps:

1. Identify the Target Market: Determine the specific market segment the startup is targeting. This could be a broad industry, like the global e-commerce market, or a niche segment, like organic baby food in the U.S.

2. Estimate the Number of Potential Customers: Once the target market is defined, estimate the number of potential customers within that market. This could involve demographic research, industry reports, or data from similar companies.

3. Determine the Average Revenue Per Customer (ARPC): Estimate how much revenue the startup can generate from each customer. This might involve analyzing pricing models, customer purchasing behavior, or industry averages.

4. Multiply to Find TAM: Multiply the number of potential customers by the average revenue per customer. This will give you the TAM.

For instance, if a startup is developing a new software solution for small businesses, and there are 30 million small businesses globally, with each business willing to spend $1,000 annually on this solution, the TAM would be:

TAM = 30 million customers x $1,000 ARPC = $30 billion

Example: Streaming Services Market

Let’s apply this to a real-world example. Consider a new startup entering the streaming services market, targeting the global market for online video streaming.

1. Target Market: The global online video streaming market.

2. Number of Potential Customers: According to reports, there are approximately 3 billion internet users worldwide, and let's assume 60% of them are potential customers for streaming services, giving us 1.8 billion potential users.

3. Average Revenue Per Customer (ARPC): Assume the average user spends about $10 per month on streaming subscriptions, which totals $120 annually.

4. TAM Calculation: TAM = 1.8 billion users x $120 ARPC = $216 billion

This TAM indicates that if the startup captured 100% of the global streaming services market, it could potentially generate $216 billion in revenue annually.

Why TAM Matters

TAM is a critical metric for investors because it helps gauge the potential size of a startup's opportunity. A large TAM indicates significant upside potential, but it also implies that there might be strong competition. Conversely, a smaller TAM might suggest a niche market, which could be easier to dominate but might also limit growth.

Stage & Progress

Where a company is in its development cycle will heavily influence its valuation and risk profile:

• Seed Stage: Focus on the strength of the idea, the initial team, and early customer validation. Is there a clear path to MVP and early revenue?

• Series A: At this stage, the company should be showing clear traction, with growing revenues and a defined customer acquisition strategy. Assess whether the company has the resources and plan to scale.

• Series B and Beyond: By Series B, the company should have a proven business model with significant revenue growth and scalability. The focus shifts to execution and market expansion. Look at the company’s ability to execute on its growth strategy and whether the current team can handle the complexities of scaling.

Deal Terms:

Beyond valuation, the terms of the deal can significantly impact the investment’s outcome:

• Liquidation Preferences: Understand the liquidation preferences and how they might affect the returns. Higher preferences can dilute the returns for common shareholders.

• Dilution: Carta’s report highlights that dilution has remained steady at the seed stage but has declined for later rounds. Ensure that the potential dilution is acceptable relative to the upside.

• Bridge Rounds: Be cautious with companies that are frequently raising bridge rounds without significant progress. This could indicate underlying issues with growth or cash management.

Evaluating a deal in a syndicate requires a comprehensive approach. By considering the valuation in context with the founder’s experience, market opportunity, product-market fit, stage of development, and deal terms, you can make more informed investment decisions.

There is no one-size-fits-all when deciding about an investment, but these are some things to consider when making an investment decision.

Resources

If you enjoyed this week’s newsletter - feel free to check out some of our past articles:

• How to Start Angel Investing

• Risk vs. Reward: The Realities of Startup Investing

• Deep Dive: SAFEs vs. Priced Rounds – What Founders Need to Know About Fundraising Options

• Beyond VC: Alternative Routes to Fundraising for Start-ups

📈 Start-Up Investment Opportunities

Please keep this confidential. If you are an accredited investor and interested in expanding your start-up portfolio, we have provided some investment opportunities that are currently active through the Red Beard Ventures Syndicate. The minimum amount to invest per deal is $1k! Please reach out if you have any questions.

xMarkets: Creator-Focused Prediction Market Platform | Polymarket ($1B Valuation) Competitor 

• xMarkets is revolutionizing prediction markets by enabling verified X users with 1,000+ followers to create markets on any topic using AI-driven tools for clarity and efficiency

• AI agent for market creation, $100 fee for quality curation, multiple resolution methods (LLMs, market creators, pricing oracles), and seamless X integration

• Secured KOLs with 10M+ followers, planning September launch ahead of presidential election. 

• Competitor Polymarket valued at ~$1B

• Led by experienced team: Co-founder AJ, MIT CS grad and former Microsoft ML Engineer, previously founded DeFi projects reaching $50M TVL and $1.1B market cap. 

• Backed by notable investors: Wes Cowan (Juice.finance), Paul Taylor (BlackRock), OneFlow Digital founder, Rahim Noorani (Satori.finance), Peter Huo (Whampoa Digital), and Eckhardt Capital. 

• Raising $1.5M Pre-Seed with $15M post-money valuation cap SAFE + $XMKT token warrant. 

• Link to invest

Meso: AI-Driven Marketing Platform Transforming Social Media Engagement

• Meso is building a comprehensive AI-driven platform that empowers marketers with real-time insights, automated workflows, and data-driven decision-making tools to navigate the complex landscape of digital marketing.

• $148,000 in revenue to date, projecting $85K MRR by December 2024, and in negotiations for $5M+ ARR deals across major enterprises in entertainment, pharmaceutical, and QSR industries.

• Backed by Keith Barr (Board Director of Yum! Brands, former CEO of IHG Hotels and Resorts), Michael Perlman (VP, Starwood Capital), and Nikhil Saraf (CTO, Struck Capital). 

• Meso's first product, Larry, acts as a proactive digital coworker for marketers, offering context-aware AI agents and auxiliary workflow automation.

• Link to invest

👋 That’s all for now friends! See you next week.

Next week I am going to dive into syndicate and fund returns and why sometimes it is important to take the risk because the reward can be far greater!

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Disclaimer: The Cap Table DOES NOT provide financial advice. All content is for informational purposes only. The Cal Table is not a registered investment, legal, or tax advisor or a broker/dealer.