This article is a result of experiential learning and my personal tryst with angels and investing. You may find this interesting to read if you do plan to get into arena of angel investing. I write this just having attending a workshop on Angel Investing organized by CIIE and conducted by two renowned entrepreneur and early stage investor personalities namely, Ajeet Khurana and VC Karthik. Through this article I attempt to bust some of the myths that possibly brought a majority of the other participants to the workshop.
1) Angels always make Moolah
How many of you actually believe that angels do really make a lot of money all the time? If you are one of those then please start jumping with joy because I just saved you your hard earned money by telling you it is not the case. Of course, you got to believe in me to feel that joy. Well! The fact of the matter is that all your angel investments don’t really give you returns. In fact the shocking news is that 50% of them might give negative returns – damn! Isn’t that a scary one?. This comes across from a lot of experience – nah not mine but some rock star angels that I have been meeting. So you got to believe this. Then there around 30% that barely give you some returns and then there are those that lets say account for 20% of your picks which will give you anywhere from 2X to 10X returns. The upper cap probably applies those that have the Warren Buffett traits. And in case you did have those traits then you would always be quoting “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1”. While I do keep hearing that at you can expect an average return across the portfolio but then beware that the while the upside are sky high and downside are rock bottom. So you don’t always rake in the moolah.
2) Angel investing is an asset class
As vehemently expressed by most of the guru’s in the angel investment world and as widely misled by investment bankers there is no asset class called as angel investment. Many try to draw parallel to stock investing backed by their god gifted value picking strategy and claim they can play similar strategies here. While to some extent it may be true as one surely needs to do value picking but not treat this as a stock picking. While some may disagree with me and do wish that someday I am proven wrong but it is evident that in the current state of affairs it requires a lot more than value picking. Someone argued with me that this is similar to investing in art. I would rather say the angel investing in itself is an art. However one of the key differential factors is that while you can always put your art fare on sale in a gallery but for your angel investment there does not exists a gallery…and now that leads me to the second one.
3) There is always an exit strategy
If you ask the angel investors that have been in this for more than 10years you will get a different response than what you may hear from someone that has probably jumped into the fray in last couple of years. Largely, both types will agree that it is difficult to find an exit for your investment. But if you do then you are a clear winner and in all probability have made a kill even if you exited a discounted value. And that’s the beauty of angel investment. Obviously, investors do get into this with the sole goal of an exit strategy and fill their pockets. You can imagine the great archer Arjuna, from the Indan epic Mahabharata, with his eye on the fish and the fish being the exit and getting the eye is equivalent to raking in the moolah.
4) Valuations is a mathematical exercise
Now this is a crazy topic. I think there is very little to say but rather for you to learn by experience. A smart angel guru will always tell you to burn your fingers to learn the valuations – now that may sound crazy. But it does seem to be true. The primary reason being that valuations while they are derived by some method of DCF, backward, forward, blah blah, they will never be the same as you perceive it. What the heck!!?? If you can’t get the valuations right then how could you decide how much to invest and ride on it? That comes as a natural reaction. In my view, while you may want to use one of these methods but you ought to have a fair understanding of the industry/sector/technology/solution and of the business plan that you are evaluating. So unless you do not have that understanding my advice is to stay away and look at the next one. Let your experience do the screening and influence your decision to invest. Some angels will tell you that they just go with their gut and I think that’s perfectly fine because at least then you curse your gut if you fail and not blame on your experience which is always invaluable unless you have only been a butcher for your entire life. Not sure if that experience ever helps in any other way. So in summary, unless you jump into the fray put your money on the table and plays the cards you will never get closer to learning and eventually winning a hand.
5) Anyone with money bags can become an Angel investor
Yeah! Of course…..why not?? Like anyone can go to a casino and win or lose money then similarly anyone with money should be able to be an angel investor. Hold on – am I not supposed to say that this is a myth. Well! The fact is that you can surely do an angel investment if you are willing to do all the hard work as a long ranger but if you are really serious about this business then my only advice is find the birds and flock together. Easier said than done – the flock usually does not let any newbie bird fly in the flock. But then there are always new flocks coming together who are more than willing to get you in their band. To straight get to the point, all I am saying is get yourself engaged with a formal angel network. Though there are not many but some of the credible ones are India Angel Network, Mumbai Angels, Ah Ventures, Let’s Venture, etc. Remember – their members move around like a gang of boys. So for you to get into their gang you need a strong referral or shit loads of money and some perseverance tagging along with them. The best part about being part of these networks is that you get the privilege to get curated deals – these are pre-screened deals that are exclusively offered to only members of these networks. Then there is also CIIE founded at IIM Ahmedabad that also curates and incubates start-ups and then open them up for investment to either these networks or to their patrons and connects. So go on be an angel and if you can get into one of these gangs then you are better off or else if you prefer to be a lone ranger then I wish you luck – I bet you will need it.
I would like to thank my friend and VESIT alumni Ajeet Khurana for some of the above understanding that he has curated over the years and fed it to me and many others during the Angel Investing workshop