100X.VC’s Sanjay Mehta On How Angel Investors Can Find Winners In The Funding Winter

Amid the ongoing funding winter, while many investors are finding their way in the dark for the right deals, there is a brave breed of angel investors that is betting big on the early-stage startup ecosystem. Like other angels, 100X.VC’s Sanjay Mehta believes the best value deals can often come in a downturn.

One of the most active angel investors in the ecosystem and the founder of 100X.VC, which has invested in over 130 startups since inception, Mehta has seen cycles like this before. Till its seventh cohort in 2022, 100X invested INR 25 Lakh for a 7% future equity in each startup. Now from its eighth cohort in 2023, it’s investing INR 1.25 Cr for 15% ownership in each startup through SAFE convertible notes.

He told Inc42 that market downturns will come and go, but through persistence, long-term horizons and patience, investors can make a bang for their buck.

At a time when the current market turmoil has forced investors to slow down deal making, particularly in later stages, Mehta is bucking the trend by not just investing in more companies but also increasing the average ticket size.

“I am not a big fan of a wait-and-watch strategy in startup investing. In the fast-paced world of innovation, startup investing opportunities can be fleeting, and investors who hesitate or fail to act quickly may miss out on potentially lucrative deals,” Mehta said, adding that there is nothing more expensive than a missed investment opportunity.

While he was hesitant about predicting what this year holds for investors, the industry veteran, who is also one of the mentors at Inc42’s AngelX gave 10 commandments for first-time angel investors on building a disciplined investment mindset in 2023 and beyond.

Edited excerpts…

Inc42: Our Investor Sentiment Survey found an equal number of investors in the bearish and bullish camps when it comes to the 2023 outlook. You, of course, have said that angels should not slow down investing. What gives you that belief? 

Sanjay Mehta: The funding winter refers to a period of time when investors become more risk-averse and are less likely to invest in startups. However, my argument is that after long periods of bullish sentiments, we see downturns. I also believe these are short-lived recessions.

These are the times that will give birth to the next set of giants in India. Therefore, investors need to discover and fund entrepreneurs who are forward-thinking to take advantage of downturns, as they are likely to have low competition, target a lower customer acquisition cost and plenty of talent looking for jobs.

In early-stage investing, the investor horizon is to stay invested for at least five years, hence any investor funding right deals in 2023 will get great low-entry valuation and a potentially high upside by say 2027 or 2028. Downturns can be a good time to invest in startups for investors who are willing to take a long-term view and can afford to be patient with their investments.

Inc42: What are your thoughts on the ‘wait-and-watch strategy’ that many angel investors have adopted, perhaps because of how large VCs are investing?

Sanjay Mehta: I am not a big fan of the wait-and-watch strategy in startup investing. This is because angel investors are not bargain hunters. They invest in deals because they are valuable and not because they are cheap.

Ultimately, the decision to invest during a downturn should be based on a careful evaluation of individual circumstances and investment goals.

In the fast-paced world of innovation, startup investing opportunities can be fleeting, and investors who hesitate or fail to act quickly may miss out on potentially lucrative deals. I have learnt that nothing is more expensive than a missed opportunity.

By acting quickly and seizing opportunities when they arise, angel investors can potentially generate strong returns and gain valuable experience in the disruptive world of startup investing.

But at the same time instead of investing because of FOMO, angel investors should continue their focus on quality entrepreneur startups, with strong market growth potential and a solid business model foundation for success.

Inc42: What’s your advice for individuals who are stepping into the angel investor pool today. How can they navigate the current market?

Sanjay Mehta: Angel investors are luck makers. Being in the right place, meeting the right person, making a small decision that in retrospect turns out to have been huge. All this takes time, but no one has gotten rich renting out their time. You need to also use the time to build conviction and take a call.

There are some guardrails. For instance, owning equity in an exponentially growing business is the only way to create wealth. Invest small capital into credible startup deals. The risk is straightforward — either you will lose all your money or make a fortune and have fun while doing it.

Investing in a startup is a delicate and unpredictable balancing act. All that an investor needs is that one point where everything holds just long enough to push the startup deal to the next level of fundraising.

This is my seven-point recommendation for new angel investors:

1. Get comfortable with the unknown: We will never know enough and will always be forced to make decisions without fully understanding what is coming.
2. Know when to let go: Do not get emotionally invested and move on to the next deal.
3. Do anything & everything: Be in the market. No coffee, meeting or speaking opportunity is too small to get the deal flow.
4. Don’t worry about the noise: Ignore the hype you see about other startups in the press
5. It’s our money: We decide which lead investor to back or founders to work with
6. Don’t seek risk: Understand the risk and then mitigate it before investing.
7. Find the balance: Allocate only the capital that we can add value, or exit.

Inc42: You increased the size of your first cheque recently. Has this impacted the kind of startups you are attracting? 

Sanjay Mehta: With our first cheque, we dominated the seed-stage funding space with INR 1.25 Cr commitment. In our last Class 08 100X.VC Pitch Day on January 21 this year, we saw a house full of investors — almost over 400 investors came to listen to 25 startups. The online showcase saw another 550+ investors.

Investing in startups seems glamorous, but what most angel investors ask is how does one get access to a credible deal flow. Knowing the right people can often be the key. Angel investors often ask me where to find startups and then how to evaluate them for funding.

Today, we have discovery platforms such as 100X.VC and others for early-stage angel investors to get validated startup deals. We make it very friendly. For instance, there is no fee charged by us to angels who invest in 100X deals and we are not syndicating deals through a network. It’s direct investing in the startup’s captable.

There are two metrics I use to judge the quality of the deals. The response on both makes me ecstatic. The first one is that our portfolio is able to raise the next round of capital at better terms than they would have otherwise. The second is when startups pitch to investors on a 100X.VC Pitch Day, it is very hard to pick winners to fund as every deal looks alluring.

Inc42: Seed-stage funding is usually unaffected by macroeconomic factors, but in Q1 2023 we’ve seen seed-stage funding fall 81% compared to last year. Should investors be worried?

Sanjay Mehta: After investing in more than 150 startups in a decade and with four unicorns in the portfolio, I could see visible opportunities to help build the Indian venture investing and  startup funding ecosystem.

100X.VC was incubated in 2019 to solve two problems. Firstly, to simplify the challenges of first-cheque funding for entrepreneurs, and second, solving investors’ problem of discovering fundable and endorsed deal flow

Investors should be worried about getting access to the right deals. Angel investors live or die by their access to investment opportunities, so what does it mean to have good deal flow?

1. Focus on founders: Strong emphasis on identifying talented founders with ambitious ideas and helping them with more than capital to turn those ideas into successful companies. For instance, we provide mentorship and resources to help founders refine their ideas, build their teams, and develop their products.
2. A rigorous selection process: Create a highly competitive application process, where only a small percentage of applicants get accepted into each cohort. This ensures that startups selected are of the highest quality and have the greatest potential for success
3. Support network: Look to expand your network of people such as experienced mentors, investors, and alumni, who can offer guidance, connections, and support to your portfolio. This network is an invaluable resource in challenging times.
4. Hands-on approach: Work as closely with startups as your structure allows, providing them with regular check-ins, feedback, and advice. This helps startups stay on track and make progress towards their goals.
5. Track your success record: With 105 startups since 2019, 100X.VC has a proven track record of success. A successful portfolio helps attract top talent and resources to your investment team as well as potential deals, further fueling your success.

Inc42: Have you noticed any difference in the startups that approach you now for funding vs the ones that were coming in during the bull run (2021)?

Sanjay Mehta: Startups in 2023 are focused on profitability and building a sustainable business. We can see investment thesis being weighted towards criteria for selecting founders over the market or the idea. Investors are seeking to invest in startups with strong teams.

Investors are more seriously considering investing in follow-on rounds of the existing startups portfolio and nurturing them, which has incentivised many businesses to focus on sustainability and real metrics. Again, this is great for the ecosystem as a whole and not just for investors.

Currently, we are seeing more startups wanting to connect with startup accelerators and incubators. Founders are valuing and seeking mentorship more than capital.

To balance dilution risks, founders are now also considering angel investors and VCs on the cap table for certain rounds, which has increased the potential for angel investors to diversify through some later-stage investing.

Inc42: What changes have you made in your investment strategy in the ongoing funding winter?

Sanjay Mehta: We see thousands of startup deals for evaluation every month. We have to make a lot of decisions with very incomplete information, and that’s why we have a framework and are cautious. Some would even say we are borderline paranoid, in the way we select our startup for investments.

Investing in a startup is never a sure thing — it’s inherently risky.

Any startup that doesn’t fall into our meticulous selection process is declined. We constantly improve our investment thesis while evaluating each deal on its own merit. We look at the founding team, market opportunity, business model strengths, unfair advantage, moat and conviction for a minimum 20X return, even though this can often be higher

While metrics can be useful indicators, they don’t always provide the full picture. In 2023, the key metrics for early, revenue-making startups are:

• Low customer acquisition cost (CAC): This shows the level of efficiency of a startup’s marketing efforts and speaks highly of the product value proposition
• High customer LTV (lifetime value): This shows how profitable your product is over a long period of time and therefore how cost-effective your tech stack is
• High customer retention: Repeat purchases are like gold dust in a downturn and often this tells you about the resilience of a product and how much value it is creating among customers

Inc42: What’s your prediction for FY24? How bad might it get? 

Sanjay Mehta: Early-stage investing is an asymmetric bet. Structure the investing in the startups for moonshot ideas. Search for startups and explicitly pick companies based not on who is highly likely to be successful on a low level, but one who has a shot at being one of the mega winners.

I would not like to get into the prediction game, but I will surely help with 10 commandments for the first-time angel investors on how to build a disciplined investment mindset in 2023-2024.

1. Start slow, do not jump on the first deal you see. Maintain transparency and honesty in your dealings with startup founders and other investors
2. Define your investment thesis and stick to them to ensure that you are investing in startups that meet your goals and objectives
3. There is no such thing as a perfect startup or a predictable winner. No one knows how to pick winners
4. Your investment decision will always have unknowns. Do your research, invest in businesses you understand
5. Connect and work with the lead investor who is writing the biggest cheque. Never invest open ended with an uncapped note. There are courses to learn about this these days
6. Startup investing is not a wealth product and exits are arbitrary. Invest only the capital you can afford to lose
7. Diversify the portfolio with a minimum of 20 investments for 3-5 years. Spread investments across multiple startups and industries
8. Be a mentor to entrepreneurs to build reputation
9. Stay informed about key industry trends, learn from the successes and failures to evolve your investment strategy
10. Building a successful startup takes time; be prepared to hold investments for several years to see a return