Investing In A Slowdown: How Angel Investors Should Approach The ‘Funding Winter’

Funding winter, slowdown, recession — for those keenly observing the startup ecosystem, the past few months have brought bad tidings in many forms. Of course, for some of India’s most experienced angel investors, these are nothing but phases that come and go, and their advice to aspiring and inexperienced angels is to ignore the noise and be ready for the right deals.

For 100X.vc founder and angel investor Sanjay Mehta, the biggest takeaway from over 10 years of investing in startups is that early stage investors should not be paying attention to temporary fluctuations in the market. That’s because one of the tenets of angel investing is to have a four-five year horizon for each investment, and sometimes even a decade-long horizon. This eliminates short-term thinking, which is typically a public markets investment mindset.

“There’s no crisis. All angel investors should be in acceleration mode all the time. In my case, we have decided to double our ticket size because everytime there’s a down cycle, we see value deals and great ideas emerging to take on the incumbents,” added Mehta, one of several angel investors and mentors who have come on board AngelX by Inc42, our four-week course that dives into the science and method behind angel investing.

Besides Mehta, angel investors such as Ritesh Malik, Pallav Nadhani, Arjun Vaidya of Verlinvest and GSF Accelerator founder Rajesh Sawhney have come on board as mentors for the AngelX programme. These mentors will guide aspiring investors into making the right decisions and at the end of the course, the learners will have the chance to even make their first angel investment.

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Investing In A Funding Winter

The Indian startup funding boom in 2021 changed the nature of the market for investors and founders, with founders dictating terms and valuations. In 2022, amid a global slowdown and focus on cost-cutting, investors have the leverage as funding has dwindled and founders are scrounging for funds to extend their runway.

But that is largely a phenomenon that is impacting growth and late-stage startups who have quite a lot of exposure to investors and have a massive scale which needs to be supported by constant funds infusion, since many of these businesses are loss-making.

On the other hand, data shows that seed funding has actually flourished. For H1 2022, as per Inc42’s half-yearly Indian startup funding report, the number of seed deals was more than the number of growth-stage and late-stage deals combined.

“Angel investing means always being in spring mode. You cannot be scared of a winter or invest recklessly when there’s a boom. You have to be consistent and not react to cycles,” Sawhney, with over 110 investments to his name, said.

The biggest reason why angels should not look at economic cycles is because the stage at which they are investing is super early and by the time the startup has gained that early momentum or traction, the market is likely to have swung from down to up.

The fundamentals for angel investors remain the same even in a global slowdown, says Ritesh Malik, founder of OYO-acquired Innov8 and angel investor in over 100 startups.

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If any angels follow the rules of investing small and investing in many startups, and maintain a long-term horizon, any temporary slowdown will not be a factor. Yes, there might be particular sectors that may be more impacted and in that case, perhaps it may not be wise to invest in those sectors, but otherwise, angels have to be open to making deals even when others are not.

“In 2032, you will not be talking about the funding winter in 2022. You will be talking about the past ten years and that is the power that a long horizon gives you, besides the perspective. Anyway, this is the best time to invest because technology always wins in a slowdown,” Malik said.

Portfolio Approach Wins In The End

Angel investment is a game of expanding the portfolio to ensure that the failed investments — there will be a few in every portfolio, Mehta says — can be covered by the winners. That means the deal flow has to remain constant and one cannot decide to not invest for a few months.

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Once an angel investor pauses their investment flow, the market tends to ignore them. It’s important to be connected and stay in the game, even if the ticket size is not large, Malik added.

“As you mature, you need to have at least a ten-year horizon for all your investments. That’s the only way you can practise the portfolio approach. And that’s only when you are likely to see the huge returns that you want. And that means never stop looking for deals, even if it is a funding winter or what not.” – Ritesh Malik