As a non-collateral mode of pooling money into startups, angel investments have gained massive popularity. Not only do they allow investors to invest their personal wealth, but they also pave a way for founders to raise money for their companies. One can fund seed and early-stage startups, give them the foundation to make it big and gain substantial returns on the investment at the same time. Angel investing can be a money-spinner, but there are big risks involved too. An angel needs to have a thorough understanding of the startup ecosystem.
In a webinar with LetsVenture, Pallav Pandey, a serial entrepreneur and angel investor, shares his take on angel investments. After working with NVIDIA in the US as a design engineer, Pallav founded Viplav Communications, a political consulting & analytics company in 2003. Later, he founded Knowlarity Communications, Singapore-based cloud telephony & AI company. Today, Knowlarity is a 300+ strong company with more than 15,000 customers, 1000 partners & 8 offices in India, Southeast Asia, and the MiddleEast region. In 2014, he founded Fastfox.com – the largest network of real-estate brokers in India. Pallav’s angel investment portfolio includes startups such as Crown it & Unirow Inc. In this webinar, he talks about the parameters that angels should look for before making an investment, and how to generate maximum ROIs.
Who is an angel investor?
An angel investor is a high net-worth individual who financially backs early-stage startups and entrepreneurs in exchange for ownership of equity in the company. Funds raised through angel investors are mostly one-time investments that are generally used to kickstart the business and get it off the ground or help the startup transition through the difficult early stages.
Angel investments are risky and usually do not represent more than 10% of an investor’s portfolio. Most angel investors have excess funds available and are looking for a higher rate of return than those provided by traditional investment opportunities. Therefore, angels offer terms that are more favorable when compared to other lenders. They focus on helping startups take their first steps, rather than the possible profit they may get from the business.
But, the important takeaway is that personal wealth is involved. Due to this reason, many angels become quite skeptical about investing in any startup. In this blog, Pallav Pandey shares some of the parameters that you should consider before investing in “any” startup as an angel investor.
Consider these parameters, always and all ways!
Angel investors should understand where to invest and where to not. Ideas have become redundant. There might be several companies that offer the same type of solutions by making minor tweaks to a base idea. How can investors know which idea is “genuine” and what should they look for in a startup before writing a cheque?
- Evaluating the startup
First and foremost, evaluate the startup. Angel investors should be familiar with the business idea and the industry challenge that is being tackled. They should try to understand the value proposition that the startup brings to the table. Once this is established, the angel should look for versatility, tenacity, and technical adeptness of the founding team. If the founders exemplify promise and dedication, the first checkbox is ticked. The next factor that comes to play is the scalability of the idea – will the business fetch desired returns in time? Angels should have a thorough understanding of the market, they should be able to envisage if the product will do good.
Most angel investments are made in the early stages – founders may just have the idea and not the product. “This is a situation where angels need to look at a trinity of factors – market, product, and team,” says Pallav. “If the product is yet to be built, try to evaluate if it will have a lasting impact on the market.” Pallav believes that angels should look for ideas that have the potential to be a game-changer or a trend-setter. If the idea is sound enough, is the founding team suited to make it a successful business venture?Pallav also advises angels to make investments in markets that are most likely to undertake a structural change in the next 3 to 4 years. Angels should then pursue those startups who have the potential to revolutionize the market altogether. Take UPI for example – UPIs took the entire payment stack in India by storm.
- Evaluating the startup
- Evaluating the deal
Investors generally make money when either the startup goes public or when they find an exit. But this is not true in all cases. There are companies that have failed to return money to investors, even after touching the $1 billion valuation mark. It is also important to understand that angel investors are at the bottom of the liquidity preference stack (see FAQs). They make money last. So, how can you be sure that the deal you are getting into is worth your time and money?
Pallav suggests evaluating the lead angel. If you are not leading the round, have a background check on the lead angel. Does the lead angel have enough expertise and market impact to lead from the front? If yes, you are good to go. Also, angels should look for the deal valuation and funding round size – what is the entry price, how much ownership stake are you getting in the company, how much funds are being raised, will the money last long enough to meet business needs? “If these numbers add up, make the investment,” says Pallav.
Pallav sheds light on his personal method. If he invests as an angel, he tries to find an exit either when the startup raises a Series B round or when he gets an approximate 4X to 5X ROI. He also advises angels not to get excited about one particular deal. “Putting 40 to 50% of your mental corpus into one deal is an unhealthy practice. Keep looking for opportunities and stay open to writing cheques,” he says.
- Evaluating the deal
Angel investment is an art. For you to make money, play most of the cards right. While seasoned angels might be familiar with these practices or may have a few that they themselves follow, new angels are the ones who often make the wrong decision. It takes time for new angel investors to get familiar with the technicalities of the investment process – be it deal flow, syndication vehicles, post-investment engagements, portfolio management, and identifying the right time to exit.
Pallav suggests that new angels talk with experts from the sector before making gut calls because they should understand what they are getting into. Pallav also believes going through a platform like LetsVenture is a good start for new investors as they receive whetted opportunities to invest in.
Here’s the full webinar:
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