Angel investing sounds cool, but then there are the ‘other sides’ of angel investing which isn’t discussed at all.
Ritesh of Stellaris ventures offers some real practical perspective.
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There are 3 reasons for my recommendation:
The fundamental difference between public and private market investing is access. If you invest in NSE stocks, you have access to the same 500 stock as the Blackrock analyst does. If you are smarter than them about investing, you can outperform them.
Not so for private investing. You may be the smartest stock picker in the country who can identify the next Flipkart. But if the founders of that company don’t come to you for money, you will make precisely $0 from that trade.
Unless you have some kind of special access – because of your cheque size, your network, your industry expertise or your brand – you are likely to see the companies everyone else has already passed on.
The people who spoke to me don’t have this kind pf privileged access. One is an HR head, another a doctor. They want to invest ~5 lakhs per company. They will almost certainly see residual deal flow of other investors and end up as the suckers of this asset class.
Many angel investors overestimate their ability to influence the outcome. The HR head said he could introduce a founder to HR leaders in other companies. “I’ll get them the first 5 Cr of revenue from my network alone”.
No battle plan survives contact with the enemy, and this one crumbles moments after being put in action. You realize that your drinking buddies meet the founder but soon stop responding to his calls. You find that the founders themselves resent your “value add” on UI improvements
After a few months the founder stops sending you monthly updates. They no longer have time for you after you tell them you can’t invest any more money.
In general, it is a terrible idea to invest in something because you think you can change its destiny. At best, your influence can prevent costly mistakes or provide a little additional fuel to something that’s already a rocketship. It won’t change a bullock cart into a Tesla.
Most new angel investors think like this: “Wow, new shiny thing! But also so risky! Let me dip my toes in and see what happens”. So they decide they will make two investments in the first year, take a pause for a year and see how those first two work out.
Now the odds are so stacked against startups that for most people, those first two investments fail. They lose that money and swear off this asset class forever. End of experiment.
Instead, angel investment requires a portfolio approach. If you’re a good investor and are able to increase the odds of “success” to 1 in 5, you still need a portfolio of 15-20 investments to get to the “market” level of risk.
The entry price in this asset class is so high and good opportunities so infrequent, that building this kind of diversified portfolio requires a large commitment of time and money. I posit that you need to commit at least Rs. 1 Cr and at least 4 years to build such a portfolio.
If you cannot put so much capital at risk and do not have the time and discipline to keep at it for so long, you should not be angel investing. Even if you do have the time and money, you need to carefully consider the access and influence issues above before you jump in.
That doesn’t mean nobody should be an angel. Just that you need to answer these questions honestly:
– Can you put >1 Cr at risk over 4-5 years?
– Do you have time to meet >100 founders a year?
– Do you have some privileged access to good startups?
If not, hold on to your money.