Planning to Invest in Early-stage Startups? Here is What You Should Know about Angel InvestmentsLet's explore on the kind of research and understanding of the business required for seed investment
ByNilesh Jain•
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There is no dearth of good and executable ideas but the challenge lies in finding those very few founders who have the conviction to execute their beliefs effectively. There are multiple factors to consider before investing in a startup as an angel investor but the Top 5 things one should consider without fail to succeed are as follows:
Domain Knowledge:
Like any other investment instrument which requires some level of research, investment in a startup also requires a lot of understanding and knowledge about the sector to understand the hidden nuances of that particular business. It is also imperative to weigh the calibre of the founder to understand his sector understanding, approach and future plans, both short and long terms, as a growth driver.
Most angel investors do a thorough Due diligence of the startup to understand:
- Scalability – can the founders actually execute effectively
- Competition – do they have a high technical risk, as a moat
- Market Saturation point – does the company have a low market risk, to dominate the market share of the total available market
- ROI - as angels do you have an exit and
- Valuation – are you getting in at the right valuations as an angel investor.
It has been witnessed that angel investors who support young businesses from their own domain areas have a far higher success rate compared to others who are betting on market trends based on external opinions.
Partnering the Cause:
Being an angel investor, one has to be prepared to be a part of that eco-system and support the startup with all possible resources. It is equally important to mentor the founders, provide networking opportunities and moral support as it is to support them financially.
Angel investment is more than pure investment in an idea or a startup; it is about investing your time, resources, finance, experience and belief and being prepared to support the journey of the young founders through the thick and thins.
Be prepared to fail in a few investments.
Portfolio Approach:
This is a risky asset class. The law of small numbers can lead to a complete loss of investments. One has to remember that investing in startups is all about talent acquisitions and ensuring you are in the right industry.
An angel investor should try and build a portfolio of at least 10 to 20 companies and limit portfolio exposure to about 10 per cent of investable assets. The bigger financial institutions that take significant risks do not tend to allocate more than 10%.
As Angel investors, one does not have the staying power or the financial expertise, so try and limit the size of the overall exposure to ensure stability.
Follow Up Investment:
While many of the investments may not derive the expected returns, one startup in the portfolio may create enough opportunities that hedge all negatives. As an angel investor, one should have enough reserve funds to do a serious follow-on funding on the company that is doing well in order to maintain your percentage ownership during the next round of funding.
Exit Strategy:
The right exit strategy can actually create wealth for an angel investor. It is important for an angel investor to have a forward-looking strategy with planned exit to create maximum ROI (Return on Investments) from all investment companies.
Conclusion:
Globally, only about 20 firms or so, in the universe of venture capital firms, generate 95 per cent of the industry's returns. They succeed because they have proprietary knowledge of the characteristics of winning companies.
As an angel investor,I prefer to invest in startups that have a low go-to-market risk and high technical build risk. In other words, I like to invest in concepts, products and founders.
