The article is contributed by Mitesh Shah, Co-Founder, Inflection Point Ventures.
Start-up investing is an emerging and rewarding asset class. While many people are now starting to consider investing in startups, the initial journey can seem daunting and hard to navigate.
If you are someone who is looking to kickstart your angel investing journey, here are some tips that could help:
Tips for First-Time Investors
Develop a personal investment thesis
As an angel investor, you should work with a personal investment thesis. This thesis will help you identify the sectors and the kind of startups you would want to invest in. In this thesis, try to cover the following topics:
- A range on how much you are willing to invest in startups.
- What is your focus – impact generation or seeking substantial returns.
- Identify sectors you are not comfortable investing in. For example, many angel investors who don’t support tobacco or alcohol consumption, do not invest in start-ups in those sectors.
Do your research and think about it from the perspective of building a portfolio
Once you have made up your mind about start-up investing, the first thing is to do is identify the right startups. Like most investments, it is imperative to do thorough research before investing in a startup. You can begin with identifying certain sectors that interest you or you can choose to be sector agnostic, but what is imperative is that you develop an understanding of the business, team and market before investing.
Target opportunities that are scalable
When looking for successful ideas to invest in, scalability becomes an important parameter to look at. Understand how large a problem they are solving; how many people will be able to adapt and benefit from the solution, what is their total addressable market size, how is the larger industry growing, etc.
Deep dive into the team
A startup idea is only as strong as the team that is going to execute it. So, when you come across an idea that excites you, gather confidence in not the founder/s but also the team at large. And how the founders plan to expand this team and hire good resources. At times people consider good pedigree - an IIT/IIM degree to be a good enough indicator of the founder’s abilities; this although might not be the best parameter at times so you may avoid following that convention.
If it’s a tech-driven business do your tech research and validation rigorously. If needed, seek advice from experts. Pay close attention to how they aim to build that tech and the timelines they are working with.
Don’t judge founders by their past failures
Don’t go in with biases. Failed entrepreneurs come with a great degree for experience and understating of “what not to do”. Research suggests the learning process of opening and closing a business increases the chances of success.
Invest in what you know
To begin your angel investing journey, it may be beneficial to start with industries and sectors that you are already familiar with or have some experience in. It positions you to better evaluate the start-ups when you are just starting out.
Invest your time, knowledge and connects
It ties into the previous point about investing in sectors you are familiar with because angel investing is about a lot more than just investing money. As an angel you can bring to the table your experience and expertise that’ll help the start-up grow. At early stages, guidance and connects are as important to a start-up as money is.
Invest with others/ Seek advice from others
Start-up investing is a risky asset class, and when you are just starting out, it might be difficult to get everything right on your own. Try investing with other investors, either through privately formed niche groups or through angel investing platforms. Other like-minded angel investors will not only help you evaluate your investment decisions but also help you learn more about the ecosystem and further identify potential investment opportunities.
Be prepared to invest for a long term
As an angel investor you will most likely invest in a start-up at a very early stage. At times startups can take some time to reach a scale wherein you get substantial returns on your investment. So be prepared to have the money invested into the startup for a long time and be patient till the start-up reaches its full potential.
Consider your exit opportunities at the time of investing
While making a decision to invest, it is also important to consider what your potential exit options will be. There are multiple ways to get an exit – follow-on rounds by VCs, M&As, IPOs etc. Undeniably, at the end of the day, your success as an angel investor is defined by the returns you are able to generate and the experience you have gathered.
Paperwork and legalities
A term-sheet defines the framework of your investment agreement with the startup. While it is a non-binding document, it is still important to make sure you have carefully considered all the terms mentioned in it. You need to know that you have the right to negotiate the terms if they don’t suit you. In the beginning, it is advised to take inputs from more seasoned investors or SMEs (Subject Matter Experts) when negotiating the terms. The important points to consider in the term-sheet are:
- Valuation of a company & ownership percentages
- Investor Rights
- Payment of Dividend
- Liquidation Preference
- Types of Shares offered
Then comes the SHA – Share Holder’s Agreement. SHA is a legally binding document upon the investor and the company, and a precisely drawn term-sheet would help ensure that there are no sudden disturbances due to miscommunication while signing the SHA.
Overall, while navigating start-up investing can seem difficult in the beginning, access to right information and a like-minded community of investors can definitely make it an enriching journey. Joining an angel investment platform can help you get access to good startups, diverse network of experienced investors and help with legal documentation. This will enable you focus your time and attention towards finding the right startups for your portfolio, where you can contribute not only dry powder, but your time and professional experience as well.