[Decoding Angel Investing] Start small, start well: the who and the why
Ola, Dunzo, Swiggy, Sugar Cosmetics, Nykaa and PhonePe. These companies have changed the paradigm of the business world by tackling consumer issues with unique business models, marketing strategies and product solutions.
But here’s the big question. Do you want to be a shareholder of these companies when they go public? Or be part of the journey by discovering the idea, creating the solution and being a real catalyst for change in the ecosystem? This is where angel investing comes in.
Angel investing allows you to invest in companies you love and believe in from day one, and closely monitor the growth (or fall) of the business.
Let’s look at Zomato. In 2010, the startup increased its round of angel investors to several investors, including Sanjeev Bikhchandani. By 2021, when Zomato went public, Sanjeev Bikhchandani’s initial investment in the company had grown and exploded 1000 times!
Globally, private markets have outperformed public markets. My belief is that when you do financial planning you need to keep aside a small allocation to the private markets and make it part of your financial asset allocation. Start small, start well.
Let’s start by answering a few basic questions.
Who is an angel investor?
Any investor or group of investors who write the first check in a startup is called an “angel investor”. The definition is broad and people tend to use this terminology for anyone who invests in startups.
For you who are looking to invest in Indian startups, SEBI has defined criteria to qualify you as an accredited investor:
As an angel investor, you would invest at a very early stage – before income or even at the idea stage – in exchange for equity in the business. It is undeniably a risky decision.
SEBI’s definition is meant to warn you about the risk of investing in private markets, and also to protect you from misinformation about which companies are funded.
At LetsVenture, we see four different investor profiles:
- CXO in large companies
- Other founders and entrepreneurs of startups
- Second generation family business owners
- Global Indian seeks to invest in Indian startups
Why do startups need angel investors?
Each year, more than 90% of startups fail. They are risky assets to begin with and have high mortality rates. However, the successful few can help you generate exponential non-linear returns as an investor.
As an angel investor, you play a crucial role in supporting startups that are at the very beginning of their journey. Usually these startups have yet to create a product or proof of concept or even generate some income.
Considering the risk associated with an unproven idea or product, most institutional investors or large investors would wait before deciding to invest, or simply avoid it altogether. Therefore, you become essential in helping founders develop their ideas and get their business started, not only with capital, but also with mentorship and support.
One of the most important benefits of being an angel investor other than life-changing returns on capital or IRR (internal rate of return), is the opportunity to be part of the startup journey and keep a close watch building the business.
Key characteristics of becoming an angel investor
I’m sure you now know angel investing is a high risk investment and asset class. The impressive and gigantic returns that can be expected from their investments may never see the light of day, or only grow over a long period of time.
To be an angel investor, here are some key characteristics you should have:
- Self-control – agreeing to make the wrong decision
- Friendliness – being a social person or being able to hold a conversation on a topic
- Availability – take the time to help your founders
- Philanthropic – seeks to ‘pay forward’ for wealth creation and value creation
- Patient – being able to play the long game and wait for feedback
Suppose you tick the boxes with these criteria, how do you now start angel investing?
At LetsVenture, after interacting with thousands of startups and investors, we’ve outlined some of the best practices you can adopt at the start of your journey.
Start with play money:
Agree to lose money. You need to set aside money that you are comfortable losing. Ideally, this should be the amount of money you have left over after reaching your savings and spending goal within a set amount of time.
Not a swing game:
Unlike investing in public markets, angel investing is not a swing game where you blindly support popular businesses or sectors. If an industry or business is already popular, chances are you’ve already missed the boat.
Winner construction game, no selection:
Startups take a long time to mature (sometimes up to five years). Treat your capital as “patient capital”. As an investor, you will have to work as hard as a founder to grow your capital. You have to create winners, you can’t pick them right away.
Plan your portfolio and build your investment strategy:
In the startup ecosystem, a “spray and pray” investment strategy is doomed to failure, especially when you have limited resources to devote to founders. Point to note, plan your investments the same way you would approach investing in public markets:
- Study the sectors that interest you (healthtech, D2C, consumer internet, agrotech, food tech, etc.).
- Use your experience in the field to understand the value you want to add to startups.
- Above all, diversify yourself. Don’t put all your eggs in one basket. Invest in startups and industries at all levels after building your investment thesis.
Start small, start well:
Before starting your adventure as an angel investor, set your goal. Assess if you are:
- Passionate about startups and technology.
- Passionate about building businesses and ideas from scratch.
- Equipped with resources (capital, time, etc.) to invest in startups.
- Rational with your expectation of return.
If your answer is yes, you don’t need a ton of capital to get started. You can start with as little as Rs 50,000. As you gain experience you can increase your investment and ensure you maximize your returns.