It can be challenging being an angel investor because there is really no course which teaches you how to become a good angel investor. Most of us learn by experience – usually by burning our fingers!
This is one of the reasons why angels hang out in communities and setup syndicates and networks, so they can learn from each other. This can be very helpful because angels are very different from each other, and each one brings different value to the table. Some have deep domain expertise, while others have deep pockets; some are seasoned entrepreneurs who can act as wise mentors; while others are experts at helping the founder to raise more money. Many are excellent networkers, and can open lots of doors for the entrepreneur by using their Rolodex.
However, the truth is that angels often get a raw deal. Some get short changed when the founder raises his next round of funding from VCs who may want to squeeze the angels out, because they want full control of the company. Some angels have been taken by a ride by unscrupulous founders, who fudge records, don’t provide progress reports, or refuse to listen to wise counsel. It’s not always easy to find good companies to fund, and deal flow is always a problem for a new angel. When the founder is a star with a proven track record, who is in a “hot space”, angels find that they have to compete with each other for the “best ” deals. Because of the fear of missing out, everyone wants to own a slice of the next hot company, which means they end up outbidding each other, as a result of which everyone loses.
While angel investing can be fulfilling, it’s important that angels learn to protect themselves from these traps and hurdles. Remember that you don’t have to participate in every deal – there will always be new founders who want to raise money, so don’t obsess over the one which got away. It’s very helpful to have a personal investing thesis, so that you find it easier to Just Say No to deals which are not in your sweet spot.
This is the engagement process that we try and follow, so we can maximise the chances of success for both the founder and ourselves.
Pre deep dive check on valuation. Our sweet spot is pre money valuation of Rs 5-6 Cr and Rs 1 Cr funding. We like to come in early and a venture which may be very attractive may be too early for us – or too evolved for us.
- At least 2 full-time promoters, with skin in the game; no side activity
- Novel ideas; bias against funding those trying to replicate an existing one
- Committed timeline: No within 2 weeks; Yes within 6 weeks.
- Alignment on broad direction before financial commitment. A 1 page word document that summarizes:
- What we are trying to achieve, progress milestones, Operating metrics should we track, what the burn rate will be for next 12 months; tranches linked to milestones, candid discussions on mutual expectations.
- Due diligence: reference checks, customer calls; Balance sheet scrutiny
- Documentation: Focus on speed and fairness; SHA relies on trust with promoters to provide warranty on disclosures related to ownership, unpaid liabilities etc. No unfair clauses eg “guaranteed returns”.
- Monthly calls to ensure everyone is on common page –It is important that things not be allowed to drift.
- External advisors and mentors should be part of monthly calls and board meetings to ensure alignment
- Active involvement in financial issues – Finance is not an area of expertise for most founders. We like to be involved in designing and monitoring of Financial and Operating MIS
- Follow on funding: based on progress, chemistry between team and us
You can read more about our investing philosophy here.
Being transparent and open helps us connect with the right founders, and creates a win-win for everyone. Yes, we do bend and break our rules, but we do this consciously.
You need to be aware of what your personal motivations are, and what you hope to get out of being an angel, so that you can be selective, rather than using a spray and pray approach. It’s great to be able to brag about how clever and foresighted you were when you invest in a startup which goes on to become a ten-bagger , but never forget that the odds are stacked against most startups, and losing money can be painful!
Signing a cheque is the easiest part of being an angel. It’s after you have invested that the hard work starts! You need to have the discipline to followup on your investments, so that you can track them. It’s important that you learn , as this will allow you to evolve , and develop a process which works for you.
Please make sure your document and record your investing thesis before putting money in any company; and track this over time, so that you get smarter with each investment you make. What do you like about the company? What are your worries? And which decisions were right? And which were wrong? And why?
Finally, please do share what you learn with the rest of the world, so that the startup ecosystem evolves in a healthy fashion.