Angel Investing — S01E02 "Taking a leap"
- This week, we have our guest writer back on our platform!
- Kiran Karthik, an active investor with 20+ startups in the last year, across multiple sectors like FinTech, Blockchain, D2C, Gaming, Edtech, and Media.
- In his last article, he shared his thoughts on what led him to explore the world of angel investments.
- In this article, he pens down his two cents on how to evaluate startups and if angel investment is the right choice for you!
Read on to find out.
In my previous post, I had shared my thoughts and rationale around what led me to actively explore the world of startups and angel-investing.
In this post, I will share some inputs on how you can get started too. But first, let's talk about why you shouldn't be angel-investing at all.
Reasons not to angel invest:
- Startups fail - While most studies have shown a 5-10% success rate in angel investing, a 2017 survey, by The American Angel, of 1,659 accredited angels in the US, showed that 39% of portfolio companies achieved a positive exit. Bottom line - A LOT of the startups you invest in may fold.
- Silver Bullets - It's possible, but highly improbable, that the one startup you invest in turns out to be an Airbnb, Uber or Doordash. According to a decade long study by the Angel Capital Association, an angel portfolio of 20+ fully vetted deals has the strongest probability of optimal returns >2.5x. Bottom line - Angel investing will require a long term view, commitment and willingness to invest in several deals and build a portfolio.
- Staying the course - Angel investing is a long and arduous journey with several roadblocks coming your way. With every year of investing, your skills on spotting patterns and trends, evaluating founders, investment timing, valuations and so on will keep getting better. Bottom line - Building a portfolio consistently over a long period of time, despite the odd hiccups, will boost chances of overall portfolio success.
Before taking the plunge, ask yourself a few key questions:
- Can you stomach some of your portfolio going to a 0x?
- Are you willing to build a portfolio of investments over a period of time?
If your answers are Yes to both of these questions, let's now talk about how you can get started. In order to start angel-investing, the following are typically required:
- Deal Flow - Now, most of us aren't a Kunal Shah or a Krishnan Ganesh to attract a consistent deal flow of high quality startups seeking to raise funds. That said, how do we consistently get access to good quality startups?
- Due Diligence - A thorough due diligence will improve chances of portfolio success. Do we have the skill set and experience required to perform due diligence on business, financials and other vectors?
- Documentation - A robust understanding of term sheets, SHAs and negotiation of pro-rata rights, tag-along rights etc are necessary to fully protect oneself as an investor. For a lot of us, almost all of these domains are new and difficult to understand.
Angel-investing as an individual can be overwhelming and solving for all three of the above problem statements at the right bar can be tough. Luckily, to get started, there are other solutions available that solve for these reasonably well.
With the increased interest in Angel Investing, crowd funding type platforms have now mushroomed allowing small, retail investors like us to get access to high quality deals, with the right collective due diligence and robust documentation to give us the best chances of success. So, what exactly do these platforms do:
- These platforms are a community of like minded retail investors from diverse sectors who pool together to fund angel rounds
- The platforms provide a forum to do collective due diligence through founder pitches, Q&As, valuation and business scorecards etc enabling the community with a base level of ready due diligence
- Negotiations of rights and documentation is centrally managed by an experienced team of partners protecting the rights and interests of every member of the community
- Platforms also have a lot of educational content by way of panel discussions, access to industry reports etc.
- The platforms typically earn revenues from annual membership fees as well as "Carry", which is a share of profits at exit, typically around 10%.
These platforms are a great way to get started, especially in the formative years of your angel-investing journey. Some of the platforms that have helped me in getting started have been Venture Catalysts, Inflection Point Ventures and LetsVenture. Just being a part of these communities and attending startup pitch calls, due diligence calls etc will go a long way in educating us and protecting us on this journey.
A few guardrails / tenets that I would high recommend, before you get started:
- Define and commit to a hard constraint on angel investment exposure - Options could be an absolute rupee value or a percentage of your net worth. This discipline is important to ensure that investing does not quickly slip into gambling. To start with, my recommendation is to keep a tight cap of 5-10% of net worth.
- Only invest money that you're comfortable losing. This is a high-risk and high-return asset class and it must only play a certain role in your overall portfolio. Build a strong base portfolio of equity, real estate, gold etc with angel-investing as a small layer on top.
I hope these inputs have been useful in deciding if angel-investing is for you. Even if you do not wish to actively invest now, a great start would be to follow key leaders in the Angel Investing space and understand their thesis on why they make any investment.
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