I’ve been investing in startups for 18 months now. It started around late 2019, after my first deep dive into the concept while working in a local venture building firm. Since then, I have faced many challenges and obstacles alone while I embarked on the less conventional route of sourcing for, evaluating, and performing due diligence on my own deals. 18 months later, I decided to pen down the lessons learned from my highly fulfilling and educational journey.
This article is the result of this process.
Breaking barriers to entry by investing in a group
The perception of startup investing being reserved only for the rich and well-educated is false. Although one would require a certain level of domain expertise to deliver consistent returns from investing in startups, the same can be said for all forms of securities investments. The main barriers to entry for any early angel investors are mainly a lack of quality deal flow and knowledge in conducting due diligence. One way to mitigate these entry barriers is to start investing with a group.
There are many high-quality syndicates (in SEA — BANSEA, Angels Central, AngelList) that provide early angel investors access to curated deal flows at a smaller cheque size. Syndicates usually have a lead investor performing due diligence on any live deals in exchange for a participation fee and a performance cost (share of your profit to the lead investor). For any early angel investors, the fee and cost are well worth the price as it helps reduce risks and serve as a launchpad for your investing career.
Importance of remaining discipline
Once a channel of deal flow is established, the next obstacle to tackle is the phenomenon called fear of missing out (FOMO). During the early stages of investing, it is important not to rush into the first investment. Instead, spend however long it takes (angel investors have no pressure to deploy capital unlike venture firms) to look through at least 50 startups to get a feel of the deal flow and build a recognition signal for good deals. Given the risky nature of startup investing, angel investors must build on their capability of controlling emotions, avoiding tunnel vision (focusing on positives only), and making clinical decisions (quickly eventually).
I’ve found out that for most investors, FOMO has slowly taken over the fear of losing capital and this should never be the case.
Learning from feedbacks
The process of building a signals recognition system requires a lot of time and research, and it does not ever stop. The feedback generated from our decisions over time and the ongoing research and investing can be utilized to improve the signals recognition system. Since this is over a long time horizon, I find the best way of doing this is to develop a habit of writing deal memos on every big decision (whether to or not to invest) I have made along the way.
Writing a deal memo helps a lot with my thought process — prevents it from extinction, de-railing during a live deal evaluation, and gives clarity to it.
Remaining competitive
Angel investing has gotten very competitive in the last decade. Most entrepreneurs want to onboard smart money (capital with value add and experiences) onto their cap table. Creating value as an angel investor helps provide a competitive edge against other investors or VCs. The values an angel investor can provide to a startup include, but are not limited to:
- Advice (legal, financial, products, GTM strategies, etc.) to entrepreneurs
- Introduction to key external stakeholders,
- Product exposure via angel’s network or social platform,
- Increase perceived value of startup,
- Knowing when to back off.
The capability to create value takes time and experience. Early angel investors can start this by building relationships with fellow angels (networking with upstream and downstream investors), providing value to startups (domain knowledge, advice, introductions) before you invest, and above all else, being sincere and honest in your actions and thoughts while contributing to your portfolio and the ecosystem.
My journey so far has been highly educational and fulfilling for me — the experience I had gained from interacting with founders, fellow investors, and other key stakeholders along the way has opened my eyes to the bigger picture of and the many inefficiencies present in our economy. In the past 18 months, I had the opportunity to invest in 4 startups from 4 different countries, and I look to invest in 4 more in the next 18 months with a focus on Indonesia and Vietnam.
