“I want to invest in startups.”
Been thinking about investing in startups? My (brief) experiences, and insights therein, on angel investing.
While we were raising for OperatorVC, and increasingly since, I’ve had friends, peers, and people I know even lesser, speak with me about angel investing. Varying perspectives — some looking to get into investing yet not entirely sure, others gung-ho on an opportunity and want to bounce it off of me, some sharing their successes (and failures), and of course, others looking to share dealflow.
In all of this, one set of people stands out, and I’m writing this with you in mind — you who have a comfortable life, are putting away a decent chunk of money every month, by now have a meaningful corpus saved up, and a sizeable net-worth (by middle class upbringing standards, though); You, who’re now looking at more interesting and lucrative avenues to invest your money, but also for the adrenalin rush that you don’t quite get enough of anymore.
I do not mean to make light of, nor do I mean to trivialise your intent and sentiment — but that was my objective take on where people are often coming from, when looking to start investing in startups (and I have on occasion been told this explicitly as well).
Let’s look at angel investing and what it takes to make it work.
A. Quality of Dealflow
- Ensuring you get to see the absolute best of deals (or at least trying).
- As a new (and thus relatively unknown) investor — you will unlikely be the go-to person for the best of deals and founders. Identifying and working on all the levers you can to make that happen is critical.
- Your investments will only be as good as the best deals you see.
B. Quantity of Dealflow
- You do everything in your power to also create a large quantity of dealflow without diluting excessively the signal-to-noise ratio therein
- Why? If you’re choosing 5 great companies, you want to do that from a sample set of 500, and not 50.
- Given the high risk in each individual company (but also high return), you balance your odds of making money through investing in at least 10–20 companies, to form a ‘portfolio’
D. Ability to Evaluate
- This is one I myself grossly under-estimated. My learning curve over the first year of investing via OperatorVC was insane, and it continues to be even today. Vertical, pretty much, in that first year for sure.
- As smart as you (think) are, your ability to evaluate startups as potential investments is going to be close to a 0–2 on 10, when you start.
You need time. LOTS of it.
- Time to work with the investee companies to create a credible reputation of being a good & helpful investor (A.)
- Time to meet people, attend (& speak) at events, to be on the right platforms to get to see adequate deals (B.)
- Time to dedicate to evaluation to then invest in 10–20 companies (C & D.)
- Last but far from least — angel investments are illiquid assets. You need to have time to hold them for anywhere between 4–7 years, before you exit with a materially good ROI from the investment.
And I can vouch for this even with my brief 2 year investing experience at OperatorVC — it is crazy how much time all of this takes, if one wants to do it even close to properly.
Now let’s talk about your financials & investing dynamics.
It’s been said by many men and women, far wiser than I, that you should, at best, invest up to 10% of your net-worth in a high-risk asset class (of which startups would likely be the highest risk).
- A typical (good) deal on the angel stage in India will have a min ticket of ~INR 5L if not more.
- If you’re going to invest in (conservatively) say 15 startups, that’s INR 75L.
- By that logic, your net worth should be a min of INR 7.5Cr (~$1.2mn) for you to ‘afford’ to invest in startups. You take a min ticket of INR 10L, and that number straight up doubles.
PS. Read the answers to this question on Quora for more pointers & reading material on this rationale.
PPS. Even if you do have a net worth that’s in that ballpark, or clearly more; you still have the points raised through A-E, to contend with.
So what does one do?
Fair question. Here’s what I would suggest:
1. Invest in an angel fund
- You can invest a smaller ticket with a fund (AIF funds will have a min of INR 25L iirc, and non AIF would be even lower)
- You don’t have to deal with constraints A-E, that becomes someone else’s job, and they’re doing (only) that.
- There are a LOT of funds out there today — it really does make phenomenally more sense to invest via one.
2. Invest via syndicates
- This makes sense if you do have the corpus to afford to do invest directly as an angel, but have constraints around A-E
- There are syndicates on most angel investing platforms today — LetsVenture, AngelList, Tracxn, and offline platforms- India Angel Network, Mumbai Angel Network and the likes. Join and follow one or more syndicates that you have strong reason to believe in.
3. Don’t Invest
- Might seem pointlessly stupid, but not investing is a definitely a credible and good option to consider
- Look at other asset classes, and risk-distributions for your investments, that work without you investing in a high-risk asset class akin to startups
- If losing ALL of that money would strongly pinch or hurt you (financially), don’t invest.
I’m honestly not trying to discourage you from getting into angel investing, through this. In having this conversation and debate with a lot of friends, and walking them through these facets of it — I realised this needs to be told more widely, and more often.
I am by no means an experienced investor and am definitely learning practically every day, and that’s all the more reason I’d love your feedback, rebuttals and your take on angel investing and how to approach it.