Technology can do wonders in structurally changing society. In India, the possibility of tech innovations and businesses have unlocked an ecosystem of companies delivering high value and growth.
With angel investors in tech startups hitting high returns, more and more individuals from India and around the world are joining the bandwagon.
The private market may be an asset class of higher risk, but it is important for investors to learn to back the right startups and eventually enjoy good financial returns as well as a fulfilling journey of guiding and seeing disruptive businesses grow.
If you are considering taking up the angel investor’s road, here are five key points to remember throughout your journey.
Have a strong investment thesis
An angel investor should begin by setting up an investment thesis to have a clear outline and strategy in place. This will serve as the foundation to evaluate deals and startups without getting carried away by the fear of missing out and biases that individual investors may have.
Investors should develop the thesis on the basis of their core competencies and start by investing in sectors they are already aware of rather than just following the trend. Investments require complete understanding of the market and thus one should begin with sectors they are confident about. Within that, investors set their bars and metrics of where a company should be before deciding to invest funds.
Govind Shorewala, Founding Partner, FairAngels.vc maintains that defining sectors one would not invest in is also detrimental to one’s journey in startup investment. It will help provide a clarity on where one would absolutely not invest and refine the approach.
Good storytelling goes a long way
We may be talking about big money and innovative tech of the modern times but sharpening storytelling skills can make a difference in investments as well. Take it from Abhishek Nag, Partner at Lightspeed India and angel investor in fintech unicorn Open, who believes a sound storytelling skill can help coordinate better investment deals.
Angel investors can look to join syndicate leads who can communicate about the specific investment opportunity. That is when people come, join, and want to invest.
Take time to really learn
The 10,000-hour rule of deliberate practice applies in angel investing as well, according to Rajan Anandran, Managing Director, Sequoia Capital and Surge.
This is why new angel investors must spend a few years learning, finding and developing a model and strategy that works for you. Just because a fellow investor chooses to focus on fewer deals and go deep does not mean everyone else should follow suit.
“The reality is startup investment is not a traditional asset class by any stretch of the imagination. I suppose bitcoin is more speculative today and though this is not bitcoin but it ain't a bond, so I think taking the time to learn is important,” Rajan said, speaking on his investment strategy at LetsIgnite 2018.
Angel investors must embody a learning mindset in order to be able to credibly answer if they have a strategy in place and whether they know about the investment deals, and a reason why startups should come to them.
Networking builds access
As an angel investor, your startup investment is as only good as the deal sourcing ability. India is home to over 72K DPIIT registered startups and it takes good networking skills to access even five percent of the 72k startups.
So, it is crucial to meet and connect with fellow investors, founders, and other members of the ecosystem to learn about startups everybody is talking about. Beyond that, it is beneficial to keep your social media handles open for startups to reach out.
It is also important for investors to bring value beyond just the capital, to the table with the intention to help founders grow. Over time, the value you bring post-investment will attract other founders.
Know the taxation and legal diligence
After much deliberation and excitement around backing promising startups and spending considerable time and money doing so, it is only wise that investors carefully seal the terms and conditions and their positions in the deal.
While business is the driving factor, knowing the legal rights and restrictions to achieve a balance between investors and the startup is just as important.
Hence, angels must safeguard their investments with documentation including the term sheet that sums up the key rights, along with more definitive documents such as the share subscription agreement and shareholder’s agreement.
Additionally, investors must stay in loop regarding any legal risks and issues related to the business and the larger market in which they operate.
(Explore Learn by LetsVenture a destination portal for lessons across stages of angel investing and free resources)
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