Angel investing seems to have become a growth industry in India today. Lots of people are happy to get on to the startup bandwagon, which is why there are so many incubators, angel groups, and accelerators being set up. Lots of enterprising investors have become entrepreneurs in their own right and have put together groups of high net worth individuals so that these syndicates can invest in the next Facebook.
While it’s great that entrepreneurship is being promoted in India and that startups are being celebrated as a result of the PM’s Startup India initiative, I’m also worried.
While it’s great that entrepreneurship is being promoted in India and that startups are being celebrated as a result of the PM’s Startup India initiative, I’m also worried.
It appears to me that these groups are starting to cut corners when they’re doing their due diligence in deciding which startups to fund.
There aren’t that many founders, and because there seems to be an increasingly large number of high net worth individuals who want to become angel investors, it seems that these angel investor syndicates are cobbling together deals at a rapid pace, because they are competing with each other in order to see how many deals they can close.
Misplaced Priorities
The priority seems to be on speed, and I feel this is misplaced. While it’s great that founders now have options as to where to raise funding from, it also means that the due diligence process is not being done properly. While it can be tempting to take shortcuts, in order to meet your quota of presenting at least four deals to the syndicate every month, this can come back to bite you later.
The reason a thoughtful process needs to be followed is because investing in startups is a highly risky business, and you need to improve your odds of backing a winning horse.
However, in the race to bring more deals to the table, and to generate excitement in the angel network, lots of immature founders are being brought in to pitch to the syndicates. It’s fun being wooed, and founders can be very charming and persuasive when they are fund-raising.
Angels love backing a passionate founder, but it takes the time to find out whether a particular founder is actually deserving of your investment or not. It’s very easy to sign a cheque in the heat of the moment because you get carried away by the founder’s pitch.
Most angels in a network will suffer from herd mentality, and are happy to play “follow the leader.”
However, the price you pay for this is that you are not able to dig into the founder’s credentials, and you may end up regretting this hasty decision later on. I have burned my fingers, which is why I have learned to say No quickly, and say Yes slowly.
If it’s such a hot deal that it goes to someone else, I am not going to lose any sleep over these missed opportunities, because I know there will be others as well – I just need to be patient and disciplined. This is not a speed dating game – it’s much more like choosing whom to marry!
Doing Due Diligence
It can be great fun signing a cheque and reading your name in the newspaper when the funding is announced can give you a kick. However, it’s much more important to make sure that the startup uses the money intelligently and performs as promised.
This is hard work and you need to get your hands dirty if you want to do it well. If you don’t do this, a lot of your hard-earned money is going to go down the drain. There is no royal road to riches, and this is why it’s important to test the integrity and coachability of the founder before agreeing to back him.
The reality is that the mortality rate of startups is extremely high – and this is true even when you’re very careful about picking and choosing which startup to fund.
If the competitive rush to present more startups and founders to angel syndicates continues, the due diligence process will suffer, and everyone is going to get their fingers burned. I think the problem is that many of these networks track the wrong metrics.
It should not be how many founders you have been able to present to your group of angel investors, or even how many deals you’ve managed to close. A far more valuable metric is what’s your angel group’s return on investment – you need to track how many of these startups have gone on to become multi-baggers for your investors.
Yes, it takes the time to generate these metrics, but angel investing should not be seen as a “get rich quick” game.
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]
