It’s not surprising when some seasoned investors belonging to the so-called elite and erudite domains of capital-intensive PE funding, consider the relatively small-ticket angel investing as indulging in pure gamble and a long endearing wait to see a rainbow of returns after making several bets.
But then – Paul Singh – one of the co-founders of 500 Start-ups – a leading Silicon Valley headquartered early stage fund and accelerator – proposes to differ – and how!
In just two years of inception, this team has invested in almost 390 start-ups, spread across 20 countries. It may even sound blasphemous – given the obvious logic, often retorted by seasoned investors to invest as per your ‘management’ capacity (and which is one reason why no structured fund makes low-volume seed investments so as to keep total number of investee companies under control). But then, 500 Start-ups seem confident of their investment philosophy – and having already made around 20 exits – accentuates that there is finally some meat in what they are doing!
Paul was in India recently meeting Indian angel investors and sharing their investment philosophy and trying to put across the point that angel investing is not just ‘Spray and Pray’ – but actually it does follow a process and there could a science behind it.
We share some interesting tid-bits from his presentation:
Start up Investors play a key role and are equivalent to being API to Venture Capital as well as Functional Capital – for they form and support the bottom-rung of deals and new talent acquisition sources
Start Up investing has evolved significantly. Today, it is not about just the capital – as ‘Right Founders’ are more important. And for the start-ups – it is the ‘traction’ which is the new differentiator!
It’s important to review data and use analytics to reveal positive deals – just as the way Wall Street and various investment analysts have been doing to get better at investing in public companies.
The ‘500 Start-ups’ Checklist for making investments:
Product solves clearly identified problem for dedicated set of customers
Capital efficient businesses – can get operational for less than USD 1 Million
Primarily internet based distribution – social, search, mobile, local
Simple revenue models – transactions, subscriptions, affiliates
Functional prototype before investment (or prior success)
Small but measurable success – transactions, customers, early revenues
Small but cross-functional team
Focus on Team, Traction, Execution and Data
You have to invest in about 126 start-ups to get mean and median returns of 3X – in short, the more you invest in – the better the return probability
Constantly track IRR and Valuations inside your portfolio
Allocate for making follow-on investments – so that you are not left out from higher pie returns
Make optimal use of Standardised documents
Always include Pro Rata and Information Access rights in your legal terms
Focus on valuations and multiples – do consider the possible downstream investors and what kind of bets they’d be willing to put on
Avoid taking board seats in early stage ventures – as they have limited value-add. Spend your time on locating new deals and let the sideway deals fall.
Look at Convertible Notes (quasi-equity instruments) as a mean to invest as they are easier to manage, are more standard and also call for low legal fees
Investing is an process. Dabbling in investing is (at best) gambling. Better to walk away, or get fully involved with managing your investments OR find someone else to manage your money for you – who can pursue it full-time
Be an Active Investor (normally you should have 20+ deals in your portfolio to work out positive averages) and be a Smart Investor (focus on information asymmetry and price/multiples)
Its indeed an interesting coincidence that in India the seed-level investment appetite is rising: and with these nuggets of advice, we all hope that more Indian entrepreneurs will find access to resources they require to make their venture dreams come true.
(The Moneyball Approach to Angel Investing – a presentation by Paul Singh – can be downloaded from http://www.slideshare.net/paulsingh)
Author of the article, Satish Kataria