Inflection Point recognizes some of our members are first-time angel investors. It is a responsibility we do not take lightly. This blog is dedicated to all our members who are entering the wonderful, exciting, financially rewarding, yet an extremely uncertain world of angel investing through our platform. We interviewed some individuals who have been able to achieve success through angel investing and tried to understand what motivated them towards angel investing and what are the key lessons they learned that can be helpful to the new investors. We have tried to capture their thoughts in a mix of DOs and DONTs. It may not lead to 100% success, but we hope it answers some of the questions that you always wanted to ask. As Eleanor Roosevelt famously said – “Learn from the mistakes of others. You can’t live long enough to make them all yourself”.
1. Evaluate the Product/idea
Start-up’s idea/product should have a strong and defensible competitive advantage with large addressable market size and good growth opportunities. It is helpful if you are or know someone who is / can be the target customer of the start-up’s product but it is not mandatory. We should also be careful to not let our personal bias affect our investment decision – just because you don’t want strangers to stay in your house doesn’t make AirBnB a bad business idea. At IPV, we have a strong preference for the ideas that we can help grow through our network.
2. Numbers don’t lie
While you can’t rely on five-year projections (also called as founders’ hopes and dreams), you should at least investigate how the start-up plans to spend your money. You should also ensure that the start-up has a scalable business model and path to profitability. One of the criteria we examine at IPV is if the customers will pay for the product or service and whether the business can turn profitable in the next 3 – 5 years.
3. Address the valuation Dilemma
Startup valuation is both science and art, actually more art than science. Valuation is driven more by factors like Founders experience, FOMO (fear of missing out on a hot sector by the investors), growth potential etc. rather than more established valuation methodologies. Still you want to structure the investment so as to have the possibility of generating a 50 percent rate of return to compensate for the start-ups that don’t succeed. And while there are no right answers, it may be better to invest in a high growth company at a higher valuation than investing in a struggling company that is available for cheap (unless you feel strongly about the founders/idea and can contribute more than just capital).
4. Understand your risk tolerance
Start-ups have a high risk of failure though potential returns can be exponential too. Hence a question you should ask yourself is how much money are you actually willing to invest and potentially lose? In this risk and return game, you need to understand the depth of the ocean before taking the dive. At IPV, we have tried to keep the minimum investment ticket size of INR 2.5 lakhs (for most start-ups) for this very reason. While seasoned investors can invest more, and most of them do, first time or new investors have the flexibility to start small.
5. Diversify your portfolio
Don’t put all your eggs in one basket. If the handle breaks all you will be left with are scrambled eggs. For any company, there is a relatively high risk that the company will fail altogether, no matter how good it looks and how confident you feel about the idea/founders/ business model. By having a broader portfolio, your portfolio won’t be ‘all or nothing’ like it is with just a single investment. We will typically recommend that you diversify the amount you have set aside for angel investment across 5 – 6 start-ups to improve your chances of success. At IPV, we will showcase approximately 20 start-ups every year giving you some good options to choose from.
6. Invest in people.
When investing in a start-up, you are not merely investing in a product or an idea. You are also investing in the founders. What drives the investment decision to a large extent is the reputation, track record and goals of the founding team. The product or idea may change many times during the business life cycle but you need to evaluate whether the founders are passionate, skillful and motivated enough to stick it out and play the long game. IPV scorecard (part of our due diligence process) has an entire section dedicated to founders analyzing their industry experience, clarity of thought and purpose etc.
7. Think in 10-year horizons.
Even though as angel investors you can expect to get an exit in 3 – 4 years but remember that on an average it may take a business 7 – 10 years from VC investment stage to eventual exit via strategic sale or IPO. Consequently only consider investing money that you don’t need in the immediate future.
1. “You know nothing, John Snow”
While it is tempting to invest in ideas where you think you can contribute more than just capital, don’t make this your sole investment criteria. Many start-ups are trying to solve existing problems that we may not be able to appreciate or may even be biased against. Our biggest strength as angel investors is that we are willing to bet on an idea and people.
2. It takes a village to raise a child
The start-up’s financial projections and the built-in exponential growth can neither be fully reconciled nor justified. So don’t look at the financial model alone. It is important to analyze the business as a whole. In addition to the point #2 of Dos, it will also be good to understand more about the product, the problem they are trying to solve, potential market size, founders’ experience, and potential exit opportunities. At the same time please note that ideas can grow exponentially in a very short period of time. Just look at how OYO is challenging the traditional hotel industry.
3. The more I practice, the luckier I get
At IPV, each start-up goes through rigorous due-diligence. Whenever an idea comes to IPV, the same is analyzed by 9 core IPV team members. An idea needs at least 3 “yes” for it to be invited to present to the broader investment group. Post the founders’ presentation, 2 members from the core IPV team and a lead analyst conduct detailed due diligence. Industry experts are brought in to support the due diligence process as and when required. IPV members’ base includes CXOs, doctors, bankers, lawyers, entrepreneurs which provide us a rich base to choose from. Findings of the due-diligence are shared with the IPV members on a commitment call. The whole process takes 2 – 6 weeks. Our recommendation is that, post the commitment call, don’t spend longer than 2 – 5 days evaluating a deal. You will never have all the answers and angel investing is also about trusting your instincts.
4. “Those who expect nothing, don’t get disappointed”
It is not common for individual angel investors to get Board seats, preferential rights etc. unless you are investing a sizable amount. So don’t have such expectations. However networks like IPV give you an opportunity to invest as a group and as a group, IPV tries to negotiate the best possible terms for all its investing members. We have been able to get Board seat, Board observer seat, access to the same information as other large investors for most of the start-ups we have invested in as a group.
5. “I will prepare and someday my chance will come.”
While it is exciting to invest in sectors that are considered “hot” in the VC space, but there is a new hot sector every 12-18 months. So don’t invest on the basis of trends, hearsay and rumors. Verify and evaluate before you invest. IPV founders’ call and commitments calls are run on a digital platform that allows all members to dial-in and participates from anywhere in the world. Members are encouraged to ask their questions and then participate in a feedback survey (at the conclusion of the founders’ call) where the members can share any additional questions they may have.
6. “What doesn’t kill you makes you stronger” Not all investments will be successful. It is the only constant in the uncertain world of angel investing. So, don’t forget to take note of the risks involved in the investment and learn from your investments that don’t succeed.
Hope all that has been shared above will help you become a better Angel Investor. Wish you all the very best.
– Ankur Mittal
Seasoned Angel Investor & Co-founder – Inflection Point Ventures
Head of Asia & Middle East – Training the Street