Angel Investment – Adrenaline and endorphins

Last week I received an exit cheque from one of my early Angel Investments in 2019. A chemical-free cosmetics start-up and not my finest pick (building a brand in a crowded cosmetics space is very tough and exit options are also limited and moreover I know nothing about this business) yet a modest reward of 3x in 3 years in Covid times isn’t bad. Last month, another start-up sent an exit cheque equal to my invested amount. At least I didn’t lose my principal. Some solace life offers in the Angel Investment world. 

I started my Angel Investment journey recently in 2019 after 30+ years in corporates and about 12 years of investing in equity markets. Today, post 17 investments, 2 exits, 0 dead and “on paper” XIRR of 40% and reviewing almost 200+ start-ups, I must say – Angel investment is a different ballgame altogether. Here are my learnings so far –

1. Why Angel investments? My broad learning from the experts, if one invests in say 30-35 startups over a specific period (2 – 5 years) and decides a fixed & same amount (either ₹2 or 5L or 10 L) for every startup and is a consistent investor, it is probable that one would make a return IRR of around 35% which is perhaps the highest amongst all the investment categories. Having said this, that is not the reason why one should jump on the Angel investment bandwagon.

Startups are very different from “new” businesses which could be anything from a retail franchisee to a trading house to a manufacturing unit. Startups identify a specific problem and try to solve it with innovation by either a product, a technology or a commercial model in a highly scalable model. In most cases, these startups will fail and shut down eventually for lack of scale, funds and many other reasons. Some will succeed and deliver fantastic results and thus the valuations. 

The whole process of identifying, investing, observing them innovate, fall/get up multiple times, scale 10/20/30x and conquer the world or die eventually is a thrill of different kinds and satisfaction.

2. How to start? Two broad options for angels to invest –

Find a startup on your own, do your due diligence, convince the founder to accept your funds, negotiate the SHA and then monitor periodically for performance. 

Alternatively, join a platform like DFAN where all you do is pick one based on your intellect, write a cheque and then – sit back and enjoy the show. These platforms receive 000’s of applications each year and they do multiple screenings to select maybe 1% which are presented to you to pick a few each year. These platforms also negotiate SHA on behalf of all the angels to ensure protection for minority shareholders.

I am on 2-3 such platforms to ensure good deal flow and choices. 

3. How to pick the right startups?

My summarised experience over the past 3 years and 17 investments is to look for the following five bullets in the order of priority-

• Founders pedigree, confidence, strategic mindset, ultimate vision for the startup and execution experience, 

• Problem definition and the solution and/or the market getting disrupted and the proof of solution acceptance by market or customers

• Total addressable market (is it 100’s of millions or billions of $’s). I prefer a billion $ plus. 

• Competitive moat, entry barrier for competition, number and strength of competitors. I like to see no more than 2-3 competitors if the TAM is large enough. 

• Valuation potential (Is it 5x or 100x) & potential exit options e.g. Series A/B/C.. IPO or acquisition or a merger with others. 

3. What will happen to my money? The following multiple scenarios happened with my 17 investments so far –

• One startup founder lost all his co-founders in tough times though retaining their stake. The founder is highly competent but lost interest as all the absconding co-founders would also share in profits without investing time and energy. This one will probably become zero eventually. 

• Another founder ran into debts and decided to sell the startup to cover the same. The only saving grace was – that he negotiated with the buyer to return the principal to the angels. Better than becoming zero. 

• One of my investments is into a content startup. The founder ran a traditional business and decided to launch a digital + transformed version of the same business for which they raised funds. The startup isn’t scaling fast enough and they recently offered to buy back angels shares at an IRR of 15%. Not exciting at all. Learning – The founder should be 100% focused on the business you are investing in. 

• Three of my 2019 investments are into tech startups solving various travel industry problems. Covid hit all of them the hardest however all three effectively used the Covid period to enhance their products, trim the cost and innovated both technically/commercially & came out stronger than before. Valuations of two are 5x & 8x in three years with great expansion plans and the third is planning another fundraise shortly. Extremely satisfying.

• I met with Mr Anand Mahindra in early 2020 and shared how we both chose to invest in an Indian startup which is solving brail literacy for the blind globally using tech. He was quick to reply – Feels good, isn’t it? This startup while slow to expand in terms of valuations (2x in 3 years) is most satisfying.

• One of the startups with a promise to solve fruits and veggies waste from farm to kitchen from 50% to 3% using a very innovative model is already 12x in 3 years.

• Some of my other 2021 investments are into Metaverse, Fintech blockchain, SaaS solutions to optimise renewable energy plants worldwide, healthcare clinic aggregator, AI & computer-based cancer diagnostics. All extremely promising and highly competent founders that I am very proud and thankful to be associated with as an investor.

4. Do’s & Dont and some learnings  –

My experience over the past 3 years is captured below. Hope this will be useful to all.

• Please do not offer advice and guidance to the founder unless he/she specifically asks. Your tiny investment does not make you the owner. Founders do not need your advice nor do they want to befriend you. All they want is your cheque and then for you to disappear. Do cheer their efforts and forget you invested your hard-earned tax paid money, which if goes down will devastate you. 

• It pays off to have your own philosophy of angel investing. After investing in all kinds of startups have decided to only invest in B2B technology-based SaaS startups with global ambitions with current valuations of less than ₹50 Cr. This is a domain I understand the best having spent 30+ years in the B2B technology space. Do not go by “tips”. 

• Be very aware of FOMO, i.e., deciding to invest out of the fear of missing out. There will always be another opportunity & one which will be better than this. You should take your time to decide and do it only when you are convinced. Make phone calls to friends who may give you insights into founders, domain, tech or maybe even the start-ups. FOMO led me to invest in a few start-ups which I now regret. Do take time to read the due diligence reports. 

• Writing cheques is in your control but entry and exit into a startup are not. This is not a mutual fund or FD with superlative returns and you can’t buy/sell when you want. This is an experiment to solve a problem. The founders decide when you get to exit and at what valuations. Invest an amount which you can forget for say 5–7 years. 

• I have been approached by a few founders with a decent exit option when their startup was doing very well. My choice of rejecting the sell offer paid off as these startups posted significantly higher valuations right after a few months.

• If you know nothing about the domain and/or industry please stay away as the chances of making mistakes are the highest. Also – any opportunity which seems to be too good to be true is actually just that i.e., “not true”. Stay away!

• I do try and understand my rights as a tiny minority investor in the SHA in the event of startups shutdowns or at the time of exit.

• I stay away from startups a) who are at the idea stage. I look for revenue-generating ones which prove many aspects of a new business b) I also stay away from ones where the problem definition is not clear c) My gut feel is not positive.

• I have put a limit of 5% of my total investments (Mutual funds, PMS etc) into angel investments to ensure losses do not put a big hole into my wallet.

• Be also aware of how the platform is making money. Some take an annual fee, some take % of profits. I like the model of the annual fee. 

• Do let your CA know about your Angel investment and understand the tax aspects. The government has laid down guidelines for Angel investors in terms of net worth etc. The angel investments are treated as unlisted equity and thus will be taxed accordingly. Offshore Angel Investments are complicated. Do talk to the platform and/or your CA and learn about the compliance requirements for sending funds abroad and when bringing back the funds with returns. 

Going forward, I have decided to be laser focussed on qualifying the opportunity as per my own vision and philosophy. My return expectations are now set to 50-100x out of these investments. 

To summarize, Angel Investment is not for the faint-hearted and nor is it the same as stocks or mutual funds. However, besides the possibility of superlative returns, the thrill of picking a few start-ups amongst hundreds and watching them grow is unmatched. It also is a serious source of adrenaline and endorphins throughout the lifecycle which is the reason for angel investing.

Himanshu Goel is a business leader currently on sabbatical and an active angel investor. He has worked for Motorola, IBM, Cisco & Microsoft for over 30 years.

His last assignment was leading India, Middle East & Africa business for Syniverse as Managing Director.