India’s two top investors share 9 secrets to successful angel investing

Two leading names in India’s angel investment and venture funding ecosystem today shared their secrets of successful investing at the LetsIgnite event organized by LetsVenture in Bangalore. They were frank, and answered every question that aspiring angel investors and startups asked them. For three hours, the hall was packed, as the audience hung on to their words.

Sharad Sharma, co-founder of iSPIRT (Indian Software Product Industry Round Table), is one of the best known startup evangelists in the country. He has invested in more than two dozen companies, and runs his own startup BrandSigma Inc that provides analytics for brands. His first venture, Teltier Technologies, was bought by Cisco way back in 2003.

He was joined on stage by Shekhar Kirani, a former entrepreneur and angel investor, who is a partner with Accel Partners, that has invested in some of India’s hottest startups such as e-commerce market leader Flipkart, cab hailing service Ola, and ticketing platform Bookmyshow. Then there are a couple of big enterprise software bets like Freshdesk and Mu Sigma.

Here are the top nine points they made:

  1. Be ready to lose money almost all of the time: About 3 per cent of firms generate 95 per cent of returns, making angel funding a higher risk exercise than VC funding. The reason is that they come in very early, and at that point it is hard to predict the future. “It is like betting on a young player. How do you predict he would be the next Virat Kohli with very few data points?” said Kirani. More than 55 per cent of angel investments recover the full investment, let alone make profits. About 7 per cent generate the kind of returns such investors look for, i.e above 10-fold returns.
  2. Invest ‘play’ money and do multiple deals: To be able to survive zero returns over majority of initial investments, angels should put in only the money they can lose, and not bet their savings on it. At the same time, new angels should try and invest in multiple startups to spread out risk and get to learn more about the sectors they are interested in. One way is to start as passive investors, like Kirani did with Flipkart as an angel, and then get to co-lead status, followed by anchor lead. “Following this stage-wise development is very important to success,” said Kirani. Right now, with tepid stock market returns and a subdued real estate market, angel investment might look attractive. But when valuations of some B2C players crash, angels should be able to survive that and move on.
  3. Top returns were earned by angels who invested more than 40 hours in due diligence: Many angels don’t do their due diligence before making investment decisions, leading to losses. “Just because your friend recommended investing in a startup doesn’t mean you should,” said Sharma. Research shows that top returns came to investors who did about forty hours of due diligence, according to the Kaufmann Foundation. In most cases, that crucial step is not being followed. With about 1-2 interactions per month with founders, angels on average earned 3.7x returns. “The number of deals is limited by the time I can spend with entrepreneurs, not for lack of capital,” said Sharma.
  4. Don’t exit too soon in winning companies: If there is pressure from other investors for you to exit, that means you probably are invested in a winner. The idea should be to build 10-20 companies without expectation of returns. “Several angel investors from 2007-08 have disappeared now, because they exited too early. You must plan for a 5-7 year marathon. Do fewer deals if your corpus is small, but don’t expect a secondary sale during that time,” Sharma said. Also, there are several innings and the inflexion points in between might be good exit points. “Stayzilla has done really well in its first innings, but I don’t know if its second innings of being India’s Airbnb will work or not. But if it does, I will make several multiples in returns,” Sharma said. “Angels should be prepared to work with startups to take them to a point where they have a good product-market fit. “
  5. Don’t get sucked into ‘momentum play’: If a sector or startup is being talked about and hyped in the media, it is already too late to invest. “As an angel you need to predict momentum 18-20 months in advance, before others get it. You should be in a position to see things that others can’t, to be able to make good returns later,” Kirani said. He said that startups that appear unfashionable now to most people, might become fashionable tomorrow. “Angels need to be able to spot that,” he said. For example, Accel India invested in e-commerce firms in 2008, with a $70 million fund, when no one was touching that sector. They became an early investor in Flipkart, which went on to achieve a valuation of $15 billion. On the other hand, several angels lost money because of investment in sectors such as e-commerce or food delivery, because they went with the current momentum alone. “Place yourself in 2018-20, not in 2016,” Sharma said. Getting in early in winning companies means that you still make great returns even if the startup’s valuation falls later.
  6. Follow a thesis or diversify: There are two ways to invest, the investors said. One is to follow a thesis, according to your area of expertise, and avoid others. “For example, I don’t get into services at all. I want to be in hot deals that fit my thesis so that I can see what others cannot,” Sharma said. His investments in companies such as LetsVenture, Amigobulls, SuperProfs and Wishberry were made according to his thesis that digital marketplaces for fragmented and offline businesses will work. Another way is to follow past investment experience. For Kirani, investments such as Hotelogix, Freshdesk, ChargeBee and Zenoti followed a thesis that India’s small and medium businesses are ready for online purchases, and it was time to bet on them for global markets. There would be occasional investments when you should back high-quality founders even if the investment does not match your thesis.
  7. Develop a strong network or be part of an existing one: Both speakers highlighted this aspect several times. “Getting into networks where you can sound out ideas and gain tacit knowledge that no database can give you, are very important to stay ahead in this game,” said Sharma. There are about 20-30 angel groups in India. “I take advice of people in sectors where I am not strong. I act on their expertise. And reciprocate it for them in areas that I know about,” Sharma said. Kirani said they talk to sector experts before investing in any company to be more informed.
  8. Think about exits when you invest: Kirani advised budding angel investors to think about possible exit scenarios early on. “When you get in, think of how you will get out,” he said. That would depend on the kind of companies angels invest in, which in turn would determine how long they should stay invested. Usually, this is between 5-7 years, but it can also be over 10 years in companies that don’t burn cash but do really well if the market changes.
  9. Be ready to change your opinions: Angels should be open to changing opinions based on the advice they get, and their own observations. The investment thesis should not become ossified, as markets changes and startups disrupt traditional businesses. “You should have strong opinions that are weakly held,” said Sharma.

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