Rajesh Sawhney On The Game Of Exits For Angels, Investing In A Funding Winter & Vetting Founders

“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.” – Rajesh Sawhney

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 for Sawhney, angel investing does not stop for any slowdown.

He’s a perennial believer in the axiom that bigger things are coming and trusts that tech startups will shape the future having seen the growth first hand as an entrepreneur too.

Sawhney was one of the founders of Indiatimes and took news giant Times Group into the internet age. And since 2010, he has been an investor in over 110 startups with a handful of exits.

Besides his angel investments, Sawhney is also the founder of InnerChef, a network of cloud kitchens and the GSF Accelerator.

The serial investor has gained a massive following in the startup circles thanks to a track record of successful exits as seen in the case of Viki (acquired by Rakuten), Little Eye Labs (acquired by Facebook), Pokkt, DailyRounds and half a dozen other startups, as well as the potential for huge upsides with the soonicorns in his portfolio.

Sawhney encourages new angel investors and even founders to always think big, but without losing perspective.

In the case of investments, that means not falling for FOMO and hype but doing the due diligence that’s required at this early level. In a candid conversation, the angel opens up about what has worked for him and how he views the game of exits for angel investors.

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Edited excerpts

Inc42: Take us through the early days of the internet ecosystem — you have seen it grow from a handful of players to over 50K startups and thousands of investors now. What have you learnt over the past 12 years of investing? 

Rajesh Sawhney: When I started, there were just three cities where you could find investors, right? Bangalore, Delhi and Mumbai. More or less that is the same today too, but there were like half a dozen very active investors and about 10-12 others who would invest at the time.

From there, now I believe that there are nearly 1,000 angel investors in India. So naturally you know there have been a lot of learnings and takeaways, which I cannot all list today.

The opportunity is far larger now but the number of competitors with cheques is also much higher. So one thing that I will say that many new angels might find pertinent today in 2022 is that I have invested through thick and thin. As angels you come in very early such that a market cycle of even two years should not matter unless of course you are backing the wrong startup.

Angel investors do not look at the macro trends such as downturns and funding winter and all that. You have to be in a spring mindset all the time and that’s why you see I have had the opportunity to grow my portfolio and also find some great exits.

The market has changed so much that at one time, exits were a distant prospect, but these days founders put pressure on angel investors to take partial or full exits because they want to bring new investors on board.

In this process, they are creating wealth and seeding the next generation of entrepreneurs. So the deal flow has increased but the fundamentals remain the same.

Inc42: Interesting that you mention that you are dealing with a lot of potential investments nowadays. What’s the number of pitches you go through every month and how did you get this deal flow going?

Rajesh Sawhney: One is there is a naturally heavy flow of deals. For instance, when I started it was two to three deals a month,but now, there’s a potential of even 100 deals a month if I want to invest in a lot of companies. So that’s there, but besides that also it’s about following some basics.

The first thing is investing in all kinds of climates and weather conditions. They may say it’s winter, but new startups are always coming up for angel investments. So I follow this principle to the core even today — keep meeting startups and chasing up leads.

Next thing is working with collaborators.

Angel investing is not a lone pursuit. There is a network of coinvestors, funds, accelerators and what not to help anyone with the right capital. CXOs who are looking to invest will have a network of their peers to rely on. This network can bring you deals or introductions to founders which will help you get a leg in.

The third key to finding good deals is backing your strength and digging deeper into the sectors you know. Obviously, with time you have to learn about every sector, but it’s important to a great degree to start with a focus area or two.

And lastly, I would say build a small team. For the first year, one can manage with a single resource, but a team is important not only when the portfolio grows, but also to boost discovery and they can broaden your expertise.

Inc42: Could you dive into the aspect of collaboration? How did you start to engage with others in the ecosystem? 

Rajesh Sawhney: Nowadays, there are so many avenues. You have individual angels, angel networks, syndicates, micro VC funds, accelerators, angel investor communities and courses, and of course larger venture capital firms.

There’s no dearth of opportunities to collaborate or find the right deal. The idea is to have an open mind when it comes to learning from these various players and leveraging their referrals.

I can say from personal experience that I have referred many deals to other angels when I have confidence and it works the other way around too.

Anyway, the other major part is using your team, right? I have a team now because one person is not enough.

You need people to vet the incoming requests, filter the referrals I get and track the portfolio for follow-on rounds. And now of course, rules keep changing so we also have someone for compliance and regulatory work. So all these people also collaborate with me. Angel investors don’t work alone.

When things in the broader market are slowing down, your collaborations will come in handy. And actually in times when funding is not freely available like right now, good companies come your way because only those companies are filtered through the network.

Inc42: Moving on to some of the more subjective areas such as horizons and thesis building. What was your approach to this when you started out and how did you gauge your own risk appetite to set your thesis? How would you define your thesis? 

Rajesh Sawhney: As a founder and entrepreneur I was well aware of what it takes to run a startup, so I know what kind of founder to back. That’s the crux of my thesis.

Anyway, I am coming at a very early stage so I don’t see revenue and all that. I look at the team and whether it is capable of delivering the product and whether the founder can run a lean ship even in a booming market. That’s why we built our thesis around ‘founders for founders’.

My goal is to invest my money in people smarter than me. If I’m doing a fintech investment, the founder should know more than me.

When it comes to horizon, my first advice to any potential angel investor who has not yet made a deal is be ready for pain in the first couple of years. The needle will not move and sometimes you might feel you are burning money because there will be no quick exits.

For me, and this is true for other angels also, the horizon for any investment is at least 10 years. Even though we are seeing some companies becoming unicorns in six months, this is an aberration. Angel investors who get swayed by such stories in the media might be in for a shock in the real world.

Inc42: Could you elaborate on that bit? Do you think there’s a lot of hype driving new investors into the market? What’s bad about that? 

Rajesh Sawhney: You want to bet on companies that have a runway of at least two years when you invest. You don’t want the company to keep coming back to the table asking for more funds and diluting equity and growing their valuations.

Yes, as an investor, you always want to see larger returns, but there was a certain culture that got built in 2020 and 2021, when companies started raising money every three to four months, which is not normal, right?

Some of these might result in quick exits, but the long-term value creation is not happening which will really give those mega returns. We don’t invest for small 2x-3x returns in quick-fire rounds, but 200x returns, which will then net the desired 20x-30x returns.

Inc42: Rajesh, I wanted to talk more about your thesis, which you said is ‘founders for founders’. What is it that you look for in a founder at this early stage? And is it just about the founder or the team at large? 

Rajesh Sawhney: Obviously, right beyond the skill set and whether the background is relevant for the business, I look for indicators such as how will they manage money, how will they manage the team in a crisis. And my team is also observing and giving their feedback on each founder we come across.

There is a need to be frugal about the money and often first-time founders don’t know this. In angel investing you will largely only meet first-time founders, and while the ecosystem has evolved over a period of time, it is still very difficult to judge how they will react in the face of adversity or can they be successful executors and successful fund managers?

Authenticity is very important to establish.

A startup pitched to us and the founder told me that he was part of a YC-backed startup which saw a successful exit, but when I probed he admitted it was a distress sale. Whereas if I had been told the truth directly, I might have even invested. So these things send the wrong signal and I look for these red flags.

On the team and idea side, I am essentially judging whether it can become a game changer, and have a huge impact and whether this is the team that can execute on that idea, better than other teams.

Inc42: What kind of mistakes or missteps are you seeing in the market currently when interacting with new investors these days? What kind of expectations are you hearing from them? 

Rajesh Sawhney: I think the biggest mistake is that angel investors forget that like public markets or any other investment, you need a portfolio. Back a lot of startups to get the desired returns across the portfolio and hedge your risks. It’s simple maths when you look at how many startups fail.

The next assumption is that if there’s a startup and it has also been backed by other noted angels, then it will definitely succeed.

Third, angel investors sometimes get caught up in short-term thinking. The whole thing is to look for massive outcomes and that upside that no one else saw.

Lastly, they think angel investment is easy. Just look at the idea and the sector trends and invest. But it’s actually a long-term vision play. You need to be able to think deep into your horizons and put an effort to learn.

For instance, until last year, we didn’t understand enough about web3, so as a team we made a lot of effort to get up to date through webinars, seminars, meetings with founders and influencers. It’s a huge technology gamechanger. Sometimes things are very big and you need to keep learning whether one thing will be particularly huge.