Due diligence is the process of researching and analyzing a potential investment before making a decision. The process can include reviewing financial documents, assessing market trends, evaluating management teams and a lot more. Essentially, due diligence is all about doing your homework to make an informed investment decision. When it comes to investing in startups at very early stages, due diligence can be more art than science.

Investing without proper due diligence can lead to disastrous financial losses, missed opportunities, and frayed relationships.

On the other hand, conducting thorough due diligence, though often time consuming, can help an investor make better informed investment decisions that align with their financial goals, risk tolerance and investment horizon. By conducting proper due diligence, an investor can gain a deeper understanding of the investment, evaluate its potential returns and risks and make a decision that is right for them.

However, it is equally important to balance thoroughness with speed. Many times, there are very few or no financials and legal documents for an investor to review and make decisions on. This is especially true at the pre-seed and seed stages of many tech startups. At Saka, we look at diligence a little differently. We believe the usual diligence is required but we also believe it doesn’t have to be a very long or complicated process for the founders. 

At Saka Ventures, we try to balance speed of decision making with as much data to back up a decision. After a meeting or two, we can confidently tell if a company, and the founders, are onto something that requires more time or the startup just isn’t a fit for us. If we eventually move to a conditional, yes, we start our diligence process.

Here are some key steps we employ in conducting due diligence when evaluating a potential investment:We start by reviewing the company’s financial statements, including income statements, balance sheets, cash flow statements, KPIs and other metrics. This gives us a sense of the company’s financial health, growth potential and profitability. We try to look for consistency and accuracy in financial data and projections, as well as, a clear and viable revenue model. A startup’s financials should reflect a good understanding of the market and the expense projections are a good indication of that understanding. 

In India, we have seen that, often, founders start working on an idea well before incorporating a company and sometimes, the incorporation can take a significant amount of time. Hence, very often, there aren’t any financial or legal documents to review. In such instances, we ask for three to six months of bank statements to review. If these don’t exist, we ask the founders to share financial projections for the next one to two years. We believe that most financial projections for early-stage startups are a waste of time but the expense projections are an incredible indicator of how the founders are thinking about their business. 

We look for an efficient use of capital and realistic assumptions about the market and growth. We also look for potential risks, such as legal liabilities or debt obligations, such as repaying a relative for their help before the company was setup. When investing in a market like India where, frequently, there are complex structures used, it’s critical to understand how the finances flow from investor to operations, customer to operations and, eventually, where is value being created. We want to make sure that we are investing in the entity where the value creation is occurring.

In assessing the market where a startup operates, we research the market speaking with other investors, founders and our advisors and mentors, many of whom have been entrepreneurs and operators in cross-border startups straddling the US and India. We also examine industry trends and direct and indirect competitors in the space. Many times, we pass on investment opportunities because it’s a market we don’t have enough information or just haven’t formed an opinion on.

In our opinion, the most important part of investing in pre-seed and seed stage companies is to assess the founding team. We look into the company’s founders, including their experience, track record building companies and products as well as selling them. In India, over the past decade, we’ve seen a massive surge in the number of high quality operators across the spectrum needed to scale a young startup. We try to assess a founder’s past contributions and what they’ve been able to accomplish. Unfortunately, this is sometimes quite opaque and requires much more than reference checks. We don’t rush this process. We take our time getting to know the founders and understand how they think and act. Building a relationship can take a lot of time and effort. Some times, we will pass on an investment opportunity because we haven’t yet been able to establish a working relationship that we can build on over the next ten to fifteen years it takes to build a successful startup. 

Some key documents we request early on in addition to financial, legal and operational due diligence, are a cap table showing the ownership structure of the startup and details the percentage of ownership for each investor, the articles of incorporation which outline the legal structure of the startup and its key provisions, such as the number of shares authorized, the board of directors and the initial shareholders, shareholder agreements which detail the rights and obligations of the company’s shareholders and outline procedures for important decisions, such as the sale of the company or issuance of new shares and, finally, the employment agreements which detail the terms and conditions of employment for key executives and employees.

We like to ensure that the startup has a strong legal foundation, with a clear ownership structure and contracts that protect the company’s assets.

Investing in startups is not a one-size-fits-all approach and taking the time to conduct data driven and human due diligence can help mitigate the chance of investing in the wrong company or people but since startups are high-growth and have high failure rates, it still may not prevent financial losses.

If you’d like to hear more, I did a short video on this topic a few years ago.

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This post was originally published on the Saka Ventures blog.

Congrats to everyone who BTD on either of these.

There’s alot of discussion about where BTC and ETH prices could go but there are still a lot of naysayers. Some of the doubters are quite well read and know what they’re talking about. Could they still be wrong, I believe they are but it’s still important to hear arguments against bitcoin. Check out this really great read by Simon Wardley about the future of Bitcoin(written in 2013).

News

1. BITCOIN COULD BECOME WORLD RESERVE CURRENCY, SAYS SENATOR RAND PAUL
   Bitcoin could become the world’s reserve currency if more people lose trust in the government, said Senator Rand Paul, who accepted BTC donations in its 2016 campaign.
   
2. Disney is launching NFTs
   Disney is collaborating with Veve for its first NFT collection called the “Golden Moments”, which feature golden statues of the characters as digital collectables.
   
3. Axie Infinity, Decentraland and ‘metaverse’ cryptos rally after Facebook rebrands to Meta
   Facebook’s decision on Oct. 28 to rebrand itself to Meta — to indicate its plans to build an avatar-filled metaverse — helped spark a speculative rally across cryptocurrencies that belong to similar virtual world projects
   
4. Citigroup CEO: ‘Very tangible benefits’ come from digital currencies
   Citigroup’s CEO Jane Fraser says that digital assets provide benefits in the area of real-time payments.
   

Here’s an interesting Tweet showing the value of a dollar and what it bought/buys.

As the “irrational exuberance” continues, it’s worth noting that Shiba Inu is now valued higher than Nissan and LG Electronics even though, Mr. Musk has stated that he doesn’t own any.

Meme of the Week

In other irrational news, I finally jumped into the NFT space minting 3 NFTs in a public sale. This is my first and I have no idea what will happen but I thought it was a good way of upping my education by putting some money where my mouth is. I’m also planning to participate in another NFT pre-sale which was delayed. Keep your fingers crossed!

Speaking of NFTs. Next week is NFT.NYC. It’s a big conference with over 3,000 people expected at the main conference venue, not including smaller events happening around town. If you’re going do tag us (@invest_stream & @pjain) on some tweets!

Speaking of Twitter, I’m doing my first Twitter Space with the founder of Indian startup Chingari and the launch of their token for the creator economy. Join us on Saturday 30th of October 2021 at 9:30am EDT / 7pm IST

https://twitter.com/i/spaces/1ynKOZQpBzExR

This post originally appeared in my Substack newsletter.

It’s been an interesting week in the crypto and NFT worlds. Bitcoin just broke the all time high this morning getting close to $67,000 as of this writing. Bitcoin is up around 20% in the last week, largely on the heels of the first Bitcoin Futures ETF launching in the US on Monday. More on that below. 

One NFT collector turned down almost $10 million for an NFT. Younger people are getting more into crypto building, mining and creating. Check out this very inspiring video by young, Teresa Melvin but don’t worry. Older billionaires and old school corporate-types are also jumping on the bandwagon.

News

1. Billionaire investor Carl Icahn thinks Bitcoin may be the best hedge for inflation
   Billionaire investor Carl Icahn warned Tuesday that the next market crisis may be on the horizon, and Bitcoin (BTC) could be the best hedge against inflation.“In the long run, we are certainly going to hit the wall. I really think there will be a crisis the way we are going, the way we are printing money, the way we are going into inflation. If you look around you, you see inflation all around you, and I don’t know how you deal with that in the long term,” Icahn said on Monday with CNBC.
2. Bitcoin futures ETF debuts with highest-ever first day ‘natural’ volume of $1BProShares’ Bitcoin Strategy ETF saw around $1 billion in volume on its opening day, with 24.313 million BITO shares changing hands.
3. Mariah Carey buys Bitcoin, hopes to empower fans through educationPop icon Mariah Carey is the latest celebrity to embrace Bitcoin (BTC) through the Winklevoss-led Gemini cryptocurrency exchange, offering another sign that digital assets are becoming mainstream.
4. Chicago Board Options Exchange to aquire cryptocurrency market ErisX
   The news of institutional interest in the crypto market continues to gather steam with the announcement of the CBOE acquiring ErisX. The CBOE looks like they’re going to continue iterating on the Bitcoin futures product they launched in 2017 with this acquisition.
5. Morgan Stanley CEO says he respects cryptocurrencies and praised blockchain
   Morgan Stanley CEO says he respects cryptocurrencies and praised blockchain
   “I don’t think cryptocurrencies are a fad. I don’t think that goes away,” he said on the bank’s third-quarter earnings conference call with analysts yesterday morning.
   “I don’t know what the value of bitcoin should or shouldn’t be, but these things aren’t going away. And the blockchain technology supporting is obviously very real and powerful.”

Meme / Tweet of the Moment

Some of you may have been hearing about DeFi lately. “DeFi” is short for “decentralized finance”. It threatens to upend how banks, money lenders and many other aspects of the financial system around the world works. If you would like a quick primer on DeFi, check out this article on Investopedia.

This post also appears on my Invest Stream Substack

It’s been another exciting few days in crypto. I was planning to send this on Fridays but as is the case with the crypto world, things move fast so here’s some midweek news.

El Salvador recently launched Bitcoin services across the country. In just a few short weeks, 50% of the country has a Bitcoin wallet. Preliminary anecdotal reports suggest that people are actually using Bitcoin for transactions in the country of a little more than 6 million people. Satoshi Nakamoto’s use case for Bitcoin is finally seeing a real world scenario play out. Keep a close eye on this “sovereign beta test”.

News

1. Google Partners With Bakkt to Bring Google Pay to Crypto Users 
   Digital asset marketplace Bakkt has partnered with Google to expand the usability of cryptocurrency. Thus, users will soon be able to add their Bakkt Visa Debit Card directly into Google Pay. Bakkt will also be using Google Cloud as its preferred cloud provider to market its services to leading US retailers and merchants.
2. Wyoming’s Senator Lummis Discloses Apparent Bitcoin Buy of up to $100,000
   The senator’s purchase was from bitcoin brokerage River Financial. Lummis was a supporter of an amendment in Congress’s infrastructure bill in August that would exempt hardware wallet makers, cryptocurrency transaction validators, node operators and other non-brokers from tax regulations.
3. Top 10 Upcoming NFT Drops According To Survey Of 500 NFT Experts
   We asked 500 NFT analysts to rate the attractiveness of 100 upcoming NFT drops. Here’s a rundown of the top 10 NFT collections based on the rating of these analysts. These projects are only just gaining momentum and therefore have the potential to yield some impressive ROI in the future.
4. Bitcoin for beginners: Here’s what to know before you invest in cryptoHad you bought bitcoin in early April 2017, for example, you could have seen a 3,700% return in just four years. 
   
   But there also have been plenty of price plunges along the way. If you’d bought in mid-April of this year, you would have lost more than half your investment in just four months.So if you’re tempted to invest, here’s some thoughts on what to consider before taking the leap.
5. The U.S. Replaces China as World’s Biggest Bitcoin Miner
   Mining is the process by which transactions on the Bitcoin blockchain are executed. It uses a “Proof of Work” algorithm. The U.S. has become the world’s epicenter for Bitcoin mining after a crackdown in China effectively eliminated the practice in the former cradle of the industry. 
6. Reese Witherspoon Gets Into Ethereum NFTs, Snoop Dogg Gives Advice
   Actress Reese Witherspoon tweeted on Monday that she bought her first NFTs and rapper Snoop Dogg, an avid NFT collector, offered advice on one of the “most influential women” to follow in the space.

Meme / Tweet of the Moment

This isn’t just a meme. It’s a tweet – check out the thread if you have time to kill.

The past week has been quite exciting for crypto “hodlers”. Bitcoin and Ether have both run up quite a bit and NFT projects continue to be hot. My Twitter Spaces is probably 95% NFT and Crypto.

1. Ethereum Outpaces Bitcoin in Derivatives Open Interest: CryptoCompare Report
   The second-largest cryptocurrency by market capitalization has, throughout September, outpaced the flagship cryptocurrency in terms of open interest across cryptocurrency derivatives products. aggregate open interest in Ethereum-based derivatives products grew 4.7% to $5.8 billion last month, while open interest in bitcoin derivatives fell 3.7% since August to $11.9 billion. 
2. Institutions buying Bitcoin rather than gold as inflation cranks up: JPMorgan
   According to a note shared by JPMorgan with clients on Thursday, the recent increase in price for BTC was predominantly attributed to institutional investors looking for a hedge to inflation. “The re-emergence of inflation concerns among investors has renewed interest in the usage of Bitcoin as an inflation hedge,” the analysts said, arguing there has been a shift in perception as to the merits of BTC in relation to gold.
3. NFT sales surge to $10.7 bln in Q3 as crypto asset frenzy hits new highsSales volumes of non-fungible tokens (NFTs) surged to $10.7 billion in the third quarter of 2021, up more than eightfold from the previous quarter, according to data from market tracker DappRadar, as the frenzy for crypto assets reached new highs.
4. AMC Theaters’ acceptance of Dogecoin follows viral community appeal
   Following an overwhelmingly positive response to a Twitter poll on Sept. 21, CEO of AMC Theater Adam Aron announced Wednesday that the chain would officially accept Dogecoin payments for digital gift cards via BitPay Wallet.The Dogecoin community — notoriously passionate for adoption initiatives — tweeted in droves to advocate for the asset’s integration within the theater’s payment options.
5. Someone Bought $1.6 Billion Worth Of Bitcoin
   Bitcoin could officially be out of the woods after an unidentified buyer purchased a whopping $1.6 billion worth of the asset on Wednesday, leading to price spiking by over 8% in just under 15 minutes.
6. Bitcoin beats stocks, commodities to become the best-performing asset of 2021
   Despite Bitcoin’s wild ride throughout the year, downside has failed to grip the market, with a 60% retracement from highs in May now all but cancelled out. The largest cryptocurrency is thus at least 13% ahead of commodities for the year, figures show this week, and 17% ahead of United States micro-cap companies.

Though not incredibly important news, definitely, very cool news: CoinDCX brings in Amitabh Bachchan as brand ambassador

Productivity Tools

1. Airtable – Airtable is one of my favorite work from home apps! It has been a cornerstone of my work from home toolkit for a long time. In 2020, I started using Airtable a lot more. I’ve been using it for managing and tracking Invest Streamrelated things like possible speakers, artwork, bios, etc. as well as using it to get startup pitches. Airtable is a great cross between a spreadsheet and lightweight SQL database. If you’re working with any sort of structured data or want to structure your data, Airtable is a great tool.

2. Notion – I started dabbling with Notion in late 2018 but I really started using it more heavily at the end of 2019. I love the flexibility of Notion and it’s definitely one of my favorite WFH products. I love that they added “Scribble” support to their iPad app. In 2020, it’s been my de facto tool for all kinds of notes, information and data. I haven’t been using the web-clipping extension but I have been using the iOS/iPadOS/macOS apps on a daily basis for scribbling on the iPad, writing up a document to be shared as a PDF with clients, collaborating on the Workomo content calendar and working with others on all kinds of content.

Notion helps me structure my thoughts a little better. It is a little complex to get started but once you commit to using it, you realize you have your own personal wiki for pretty much everything. The one thing I don’t like about Notion is the import and export functionality. 

3. Workomo – Everyone who used Rapportive years ago, will know how useful it was to have a tool that gave you a summary of people that you were connecting with. However, the problem has become quite acute with the move to online meetings / webinars / networking events / etc. I’ve been an active Workomo user since the early betas and I also do meetings with a lot of people I don’t already know. Workomo has been an invaluable tool in helping me get quick summaries about these people as well as learn a few new things about people I already know.

Conversations (audio, video, podcasting)

1. Clubhouse – I got on Clubhouse in September and, now, I use it all the time while working from home. Clubhouse is my watercooler / coffee machine at the office. If you need to take a break, chat with someone during lunch or join a discussion about almost anything, Clubhouse is the place to be. Most rooms are well moderated and people are polite and friendly. If you need an invite, I *may* be able to help so try DM’ing me and if I have any invites left, I will send you one.

2. StreamYard – 2020 might just be the year where podcasting and online video tipped. I started Invest Stream at the end of 2018 but 2020 is when I started live streaming. StreamYard is a really awesome product for doing livestreams. My friend, Gregarious Narain, found it when we were doing The Raise. It made it so simple to start streaming on multiple platforms. I’ve been using StreamYard a lot in 2020 and I love the simplicity. It’s super easy to join a livestream off your phone or iPad. Hosting a livestream is still Chrome specific, however. The free version is good enough for most people who want to get started.

Entertainment / Relaxation

1. Digital Assistants / Smart Speakers – Listen to a podcast, check the weather, play some music or talk to someone all over a smart speaker. I’ve ditched Alexa and Google Home Mini in 2020 and gone all in with the HomePod and HomePod Mini. However, whatever your choice is, I’ve found the smart speaker to be an invaluable accessory to use as a speaker phone, a stereo system, listening to the news (I like to keep Bloomberg Radio going in the background), etc. 

2. Streaming – We can all use a break after a long day of working from home. What better way to spend some of that free time than with loved ones watching Netflix, Apple TV+, HBO Max, Amazon Prime Video or Disney+ and YouTube? It’s definitely the golden age of content with fabulous shows like The Queens Gambit or The Expanse available at our fingertips along with blockbuster movies like Wonder Woman 1984! BTW, pairing the HomePod with an AppleTV 4K gives you amazing Dolby Atmos sound. There are many videos on YouTube discussing this.

As much as we’re all suffering Zoom fatigue, without Zoom, Google Meet or FaceTime, working from home over an extended period of time would have been almost impossible. They aren’t my favorite apps but they are most definitely necessary.

This post first appeared on the Workomo Blog.

Spending some time doing due diligence on potential investors can save you lots of grief in the long run. I’ve talked about this often and it’s great in theory but it’s not as easy to do in person. Now that I’m back on the operating side of a startup, here are some tips on how to diligence possible investors:

• Start with making a list of the investors you think would be interested in your startup keeping a few broad things in mind (use a spreadsheet or a CRM)
  • Vertical the company is in and is the VC firm + partner interested in the space
  • Stage of the company and does the firm invest at this stage
  • Check size that you’re looking for and what the firm writes
  • Any existing competing investments that the firm has made
• Find people you know that may be connected to these individuals
  • Have a prepared email that you can send to the people you know who can possibly connect you to these investors. The email should be a very short email that explains why you would like to connect to the investor, a summary of your startup and have a teaser deck attached. Some people like to use DocSend but I prefer a PDF.

Once you’ve exhausted your personal network, find 5-10 founders that the firm and the partner have invested in (ideally should include failed startups).

• Reach out to them on social media, via common contact or a cold email to see if they will chat with you about your startup and provide some advice on your round as well as share some info about the investor(s). If they say yes to a meeting, do some research on them, e.g. understand what their startup does, maybe check out the product, use Crunchbase to get an idea of some of their investors, how many rounds they’ve raised, you can use tools like Workomo (shameless plug) to get some background about them and common interests you might have.
• Founders can be very open with other founders. Do what you have to in order to maintain that trust. Use the meeting to do your due diligence on the investor. Ask the founder about the firm on your list and how they were to work with through the ups and downs. Make sure you are clear that this is confidential and DO NOT repeat it to anyone, even in conversation. Don’t be shy about getting into details as long as the founders are comfortable sharing. Don’t pry but don’t hold back on asking the questions you think will help you get an understanding of who the investor is and how they work.

In short, make sure you take the time to do your due diligence on investors. Itâ€s critical to know who youâ€re potentially partnering with for the duration of your startup.

Why Workomo?

Workomo is a young startup based out of the San Francisco Bay Area founded by my friend Soumitra Sharma. Soumitra and I have known each other for a few years, having crossed paths in the Indian startup ecosystem and having invested together. Soumitra reached out to me when he was raising his pre-seed round in late 2019. We had a conversation about Workomo and I committed to invest on the spot.

Since then, I’ve been spending a lot of time with the team testing out the product, providing feedback, and talking strategy with Soumitra. I even wrote some code to help them with a problem they were dealing with.

In the context of my professional career, I’ve often said that “what you do matters less than who you do it with”. I feel very lucky to have an opportunity to work with an incredibly sharp team and a founder with a crystal clear vision for Workomo.

I look forward to sharing more details about what we are building at Workomo and what we have in store over the next few months.

If you want to take the Chrome extension for a spin, please add your name to the waitlist.

I am tired of devils masquerading as angels & angel networks in the Indian startup ecosystem.

These assholes have screwed many founders by normalizing abusive terms. Holding founders hostage in their own viable businesses.

There will be a reckoning
It won’t be pretty

— Prasanna K (@prasanna_says) September 30, 2020

I recently invested in an Indian startup that closed a pre-series A round and the documents were more than 100 pages. When I was at 500 Startups, with the help of BMR Legal, we modified the 500 Startups KISS Agreement for India and open sourced the documents in the hopes that it would simplify early-stage documentation and reduce the amount of time to close a deal and the cost of doing early-stage deals in India, much like Series Seed docs and the SAFE have done in the US.

Here’s a presentation I gave in January 2020 at CIE-IIIT Hyderabad on some of the deal terms in India to watch out for. Unfortunately, there’s no video of the actual presentation I gave so I recorded a voice over for you.

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If there are additional terms you have questions about or terms you’ve come across that are onerous, please leave a comment on the YouTube video and I will respond. Hopefully, other founders will benefit from it as well.

This is what I think the basic structure of the email should be:

• Why you are reaching out
• How your startup is of interest to the individual.
• A little of your background, establishing some credibility.

Example 1

A great example of an email from a founder to an investor is:

Hi Pankaj,

I am physician entrepreneur and I run a health tech startup, <STARTUP NAME>, focused on the digital health space with a focus on diabetes. I sold my previous startup in 2015 and started this company in 2016.

I believe you will find our startup interesting because it has measurable traction, we’re going after a massive market and we’re a team that’s been working together for more than a decade.

We are in the process of raising a series A round and are looking for strategic angels that can help with international growth, business strategy, and ecosystem building. Attached is a teaser deck for your review. I would be delighted to setup some time with you to go through the business in greater detail.

In this example, the founder starts with a quick introduction and continues by adding a little about his credibility, being a physician, and selling his previous startup.

He then explains why this deal might be of interest to me. He might have done a little research or watched previous episodes of Invest Stream to know that I want to see traction in the companies I invest in, as well as, a large market size. He also knows that I care about the team and how well they work together.

He closes with why they would like me to consider investing and attaches a PDF. There’s been some debates on Twitter about the use of PDFs vs. using services like DocSend. I prefer PDFs so I can scribble notes on them and save them for posterity

Example 2

Hi Pankaj,

My name is Dr. <FOUNDER’S NAME>, co-founder of <STARTUP NAME>, an intelligent telehealth platform.

<STARTUP NAME> is an AI telehealth platform helping doctors to complete clinical documentation accurately and efficiently instead of manual, sloppy, unreadable notes. With <STARTUP NAME> providers have increased productivity and the amount of time they can spend with patients by almost 60 hours a year and are, thus, increasing their revenue by more than 100k annually.

Knowing your investment in <PREVIOUS INVESTMENT>, I think you might be interested in knowing more about <STARTUP NAME>, and what we do with AI to help physicians to be more efficient with their time.

Some of our numbers:

• 50% MoM
• +5K consultations
• +50 physicians subscribed to our platform
• +10 medical specialties

We are raising our Seed Round, and we would really like to show you more of what we are doing and get your feedback.

Let me know if I can send you my deck, or we can jump on a call next week.

I hope to hear back from you soon,

In this example, the founder introduces himself (also adding credibility that he’s a physician) and gives me quick intro to the company and the problem that it’s solving.

He also shares some of their traction information and shows that he’s researched me before dropping me a cold email (referencing a company I’ve invested in previously).

He then shares what stage they are at and why he would like to talk. I would have preferred if he sent me the deck or a teaser deck but it’s not the end of the world. 

What other examples do you have of a cold email you’ve sent out that’s worked well for you?