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Monday, September 1, 2014

All about Angel Investing (Part 1)

This article has 2 parts. Below are general questions many people ask about Angel Investing. The next article will be specific experiences and learning which I absorbed over the past 5 years of actually doing it.

NB: While I have experience mainly in tech startups, I believe the principles mostly apply to non tech angel investments too.

1) What in Angel Investing ? How is this different from other Private Investments?

Angel investing is more specific. It is investing in startups in hope that they succeed and you earn back your money via an exit (trade sale, IPO, sale to next investor).  In non tech world, you can also earn back your money via dividends once the company turns profitable. Private Investing covers angel investing but also include later stage investments into companies that are already larger, profitable etc. Private investing also covers investments into VC or PE funds. Basically investment into any non listed company.

2) Can I afford to be an angel investor? How much to invest?

We invest money that we can afford to lose completely. If you look at most strategic portfolio allocations (this is the various asset classes that experts advice people to allocate their investible money in), most will have an alternative allocation that includes private investments, art, wine, hedge funds and commodities. This percentage varies from 0% to 20%.

So lets say it is 20% of investible assets (excludes own home and current business which you run if applicable). 20% is currently what some banks recommend for alternatives and also what some UHNWI (people with more than 30M USD investible) individuals in the USA are doing.  Of course, not all 20% is for angel investing. Probably 5% of that? The other 15% is for hedge funds, PE funds, later stage VC funds, commodities etc.

Now flipping to the other side, we need to spread our bets since we do not control the companies we invest in. We will make mistakes and invest in bad models or bad people. So lets say at a minimum of 25K per investment and at 10 investments over 5 years, this means 250K is 5% or we need an investible net worth of about 5M min.

3) Is 25K the usual quantum for Angel Investments and what does that buy?

From what I can see, most angels in this region invest anything from 25K to 200K. One mistake I made early on was to invest way above that. Doing so made it hard for us to diversify properly and spread our bets. If your average bite is supposed to be 25K and you are doing 12 companies, then you can allocate 50K for 2-3 exceptional stories that you feel strongly about.

In the current tech space, angel/Seed round valuations range from 1M to 2.5M and amount raised is usually 500K. So 25K buys you anything from 1-2%.

4) What kind of returns can I expect as an Angel investor and in what time frame?

We all read about the lucky guy who invested in the next FB or Google. But lets face it, most Angel Investors in this region will take anything from 2 years to 10 years or more to exit their investments. We have invested in 7 startups in SG and regionally so far. None have exited yet. Luckily none have failed yet too.

So the usual timeframe to expect will be similar to a early stage VC fund. Anything from 3 years to 10 years for exit and blended returns of above 25% annualized would be good.

5) How do I get deals?

This is critical for success. There are a 2 ways that have worked for me.

a) Spread the word that you do coinvesting alongside incubators for SEED and Series A rounds. This way, you follow the lead investor for deals. This method has an advantage in that the lead investor helps settle the terms. It helps if you actually invest in some of these VC/incubators too.

b) Value add when you meet founders. Don't just view founder meetings as potential investments. Rather try to help them with your experience and connect them to relevant people. After a while, people will see you as a good person to talk to regardless of whether you invest.

6) What is my role as an Angel Investor?

With a stake of 1%-2%, you are not expected to play an active role in the business. Experience sharing if you have it and can get along with mgmt would be good periodically. Connecting to relevant people too would be useful if you have such contacts.

Of course, if you invested a lot or very early and own >5%, then it is entirely possible that the management wants you to perform some structured role. All these should be decided before investment.

7) I don't have access to good deals or any good value add, I just want to invest. What else can I do?

Of course, another way is to outright invest directly into early stage/Series A funds. You will be called in LP (limited partner) if you do so. Usual quantum ranges from $100K (for small funds) to $5M for large funds. The expected returns for these funds range from 15-25%. Some names in this area include Jungle Ventures, Golden Gate, Walden, Monkshill, 500Durians/Startups and many more. They are all raising capital now.

You can then treat these investments just like a mutual fund but classify it under alternatives.

In my next article, I will share specific experiences and learnings we have from our own foray into angel investing.

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