1. Be ready to lose
money almost all of the time: About 3 percent of firms generate 95 per cent
of returns, making angel funding a higher risk exercise than VC funding. The
reason is that they come in very early, and at that point it is hard to predict
the future. 'It is like betting on a young player. How do you predict he would
be the next Virat Kohli with very few data points?' More than 55 percent of
angel investments recover the full investment, let alone make profits. About 7
percent generate the kind of returns such investors look for, i.e above 10-fold
returns.
2. Invest ‘play’
money and do multiple deals: To be able to survive zero returns over a
majority of initial investments, angels should put in only the money they can
lose, and not bet their savings on it. At the same time, new angels should try
and invest in multiple startups to spread out risk and get to learn more about
the sectors they are interested in. One way is to start as passive investors,
and then get to co-lead status, followed by anchor lead. Following this
stage-wise development is very important to success. Right now, with tepid
stock market returns and a subdued real estate market, angel investment might
look attractive. But when valuations of some B2C players crash, angels should
be able to survive that and move on.
3. Top returns were
earned by angels who invested more than 40 hours in due diligence: Many
angels don’t do their due diligence before making investment decisions, leading
to losses. Just because your friend recommended investing in a startup doesn’t
mean you should.' Research shows that top returns came to investors who did about
forty hours of due diligence, according to the Kaufmann Foundation. In most
cases, that crucial step is not being followed. With about 1-2 interactions per
month with founders, angels on average earned 3.7x returns. 'The number of
deals should be limited by the time oneI can spend with entrepreneurs, not for
lack of capital.'
4. Don’t exit too
soon in winning companies: If there is pressure from other investors for
you to exit, that means you probably are invested in a winner. The idea should
be to build 10-20 companies without expectation of returns. Several angel
investors from 2007-08 have disappeared now because they exited too early. You
must plan for a 5-7 year marathon. Do fewer deals if your corpus is small, but
don’t expect a secondary sale during that time. Also, there are several innings
and the inflexion points in between might be good exit points. Angels should be
prepared to work with startups to take them to a point where they have a good
product-market fit.
5. Don’t get sucked
into ‘momentum play’: If a sector or startup is being talked about and hyped
in the media, it is already too late to invest. As an angel one needs to
predict momentum 18-20 months in advance before others get it. You should be in
a position to see things that others can’t, to be able to make good returns
later. Startups that appear unfashionable now to most people might become
fashionable tomorrow. 'Angels need to be able to spot that.’ For example, Accel
India invested in e-commerce firms in 2008, with a $70 million fund, when no
one was touching that sector. They became an early investor in Flipkart, which
went on to achieve a valuation of $15 billion. On the other hand, several
angels lost money because of investment in sectors such as e-commerce or food
delivery, because they went with the current momentum alone. 'Place yourself in
2018-20, not in 2016.’ Getting in early in winning companies means that you
still make great returns even if the startup’s valuation falls later.
6.
Follow a thesis or
diversify: There are two ways to invest for an angel investor. One is to
follow a thesis, according to your area of expertise, and avoid others. “I
don’t get into services at all. I want to be in hot deals that fit my thesis so
that I can see what others cannot,” says Sharad Sharma at LetsIgnite. His
investments in companies such as
LetsVenture,
Amigobulls,
SuperProfs and
Wishberry were made according to his thesis that digital
marketplaces for fragmented and offline businesses will work. Another way is to
follow past investment experience. For Shekhar Kirani of Accel Ventures,
investments such as
Hotelogix,
Freshdesk,
ChargeBee and
Zenoti followed a thesis that India’s small and medium
businesses are ready for online purchases, and it was time to bet on them for
global markets. There would be occasional investments when you should back
high-quality founders even if the investment does not match your thesis.
7. Develop a strong
network or be part of an existing one: Getting into networks where you can,
sound out ideas, and, gain tacit knowledge that no database can give you, are
very important to stay ahead in this game.' There are about 20-30 angel groups
in India. Take the advice of people in sectors where you are not strong. Act on
their expertise. And reciprocate it for them in areas that you know about. Talk
to sector experts before investing in any company to be more informed.
8. Think about exits
when you invest: Budding angel investors need to think about possible exit
scenarios early on. When you get in, think of how you will get out. That would
depend on the kind of companies angels invest in, which in turn would determine
how long they should stay invested. Usually, this is between 5-7 years, but it
can also be over 10 years in companies that don’t burn cash but do really well
if the market changes.
9. Be ready to change
your opinions: Angels should be open to changing opinions based on the
advice they get, and their own observations. The investment thesis should not
become ossified, as markets changes and startups disrupt traditional
businesses. Quoting Sharad Sharma 'You should have strong opinions that are
weakly held.”
