My Angel Investing Playbook!
Background
I am a founder, who loves to support other start-up founders and have invested in over 40 early-stage start-ups. One question I am asked frequently — what is the most crucial factor you look at while investing?
My answer — the founder.
What method do I use to evaluate the founder and the opportunity?
Answer — I usually stick to this 3-step evaluation process
1) Know thy neighbor (most important)
2) Know thy neighbourhood
3) Know thyself
1) Know Thy Neighbour — The Founder
For me, this is the most important aspect and hence it’s almost a pre-requisite to meet the founder in person. It’s important for me to know how driven the founder is & how committed is he/she to this idea. How badly does he/she want to succeed? Is he/she just dating the concept or is married to it?
While there is no way to get a straight answer to this, there are hints.
a) I try to find his / her ‘why’!
Why is the founder in this space, Is it only a financial drive? Does he/she want to prove non-believers wrong (out to use success as revenge)? Is family the drive (changing the family’s orbit)? Or is it pure passion? What keeps him/her awake — why is he/she doing this?
Jim Rohn used to say — that when the ‘why’ is clear, ‘how’ becomes easier. If the reasons are strong — the founder will persist & persevere to find solutions to problems that the business encounters, ‘reasons’ will keep him/her going!
I look for some other things that shed light on the founder’s conviction
b) Pattern of Excellence (Education or sports or hobby)
A lot has been said about pedigree bias, and why IIT/ IIMs are able to find investors. It’s because excellence in education reflects a competitive streak, drive to excel, and persist.For me, if any founder has an excellence streak anywhere, it builds confidence — could be — past experience, in sports, in any extracurricular activities, or in academics.
c) How much ‘ Skin in the game’ does he/she have
What has the founder given up to chase this dream?
What has he /she done already? Gave up a well-paying Job/stayed away from home to make this work in a big city? / launched the product in whatever shape and form he/she could? onboarded some members or a co-founder? been paying the team / invested his own money / took friends’ help in getting this off the ground / went out to sell to customers etc
Something needs to show the skin in the game. I don’t look at concepts seeking funding. Some traction is a must for me — getting idea off the ground shows grit/determination. If the founder can’t convince himself/herself to go all IN — when the going gets tough, giving up will be very easy!
D) Hustle and storytelling capabilities. The vibe!
I also see, if I am convinced about the genuineness of the ‘reason’, Is he /she someone I can trust?
The gut is usually right!
E) Does he/she have a Plan B
Answer to what happens if you don’t raise money? I have often seen, that wherever there is a plan B, plan A fails :)F) Lastly, I too have some Rapid Fire questions!
Things he/she is proud of / scared of / Worst & best phase of the journey so far and how he/she dealt with it / Dream come true scenario / Books he/she is reading / Things he/she likes to do on weekends / People he/she follows/looks up to / Gradual success or success at any cost / Spiritual/Believes in karma?
Objective is to observe patterns.
In addition to all the above points I look for one ‘ Warning Sign’ — People Skills — This one is very tough to judge early but can destroy the best of companies. Humility, Empathy, and a willingness to share equity with others are a must for me.
Disclaimer — These are just patterns, no guarantees
2) Know thy neighborhood
If the founder part is settled, there are also ways to broadly evaluate the category/business idea.
A) TAM (Total Addressable Market) — How big the opportunity he /she is trying to disrupt. (TAM / SAM/ SOM)! I usually am OK to enter niche areas as long as the founder is good. A great founder in a big category is a great recipe for success.
B) Team — What kind of people have already been sold the dream (internal selling)? Again, important to see the first few people the founder has been able to convince! A co-founder is a bliss — Bible (paraphrased) says — if 2 people decide on a mission, nothing is impossible, it will be given! (Matthew 18:19)
C) Differentiator — How is the idea different? Let’s say, the category is big, the team is good, and the founder is good, It’s important to see if there is a strong reason to buy for the consumer. What problem is the business solving and for whom — this needs to be clear!
D) Hygiene — How ready is the founder to handle money (presentation/signs showing attention to details/customer obsession/willingness to learn*)
*Disclaimer — I believe, at this early stage (seed/angel), there are many moving parts that need to be fixed. Expecting a 10/10 or even a 7/10 in terms of the founder knowing all the answers & with all parts taken care of (perfect deck/strategy/compliances) is borderline unreasonable. All start-ups have evolved, what they started as and what they are doing at scale is very different. There should always be some grace marks given for sloppy edges. Just go back to how you were at the early stage of your life — did you have it all figured out? If you find a genuine founder who might be a little off on a few aspects, help him/her fix things. No one is perfect at this stage (for that matter even at scale there would always be things to fix, as long as the intent is good, things can be fixed)
3) Know thyself
Finally, knowing yourself is also important.
One needs to accept and agree that -
A) Risk Basket — Angel investing is a risky business. Yes, no one likes to lose money but be prepared that in this class — out of 10 investments, 2–3 businesses will fail, 3–4 will give moderate returns, and 2–3 might give a good one. Know this right at the start!
B) Boundaries — Have own investment thesis (industry type/ stage of the company (for me I usually like to enter in the Seed stage) /instrument (debt/equity — I like straight equity) /cheque size (define the range — for me its usually between 10L-25L) / others (For me — I love the underdogs / avoid bridge rounds / like to invest in Women-led start-ups / love unconventional ideas etc)
C) Know the kind of people you like (aggressive founders/ humble / success at any cost / slow and steady). Its ok to not proceed with people who are not the kinds you would like to work with / align with your energies / value system and vice-versa (no hard feelings on this)!
D) Spread — If you have X you can invest each year in this, divide it by 10, and invest in 10 start-ups rather than investing it all in one. It helps you have a better spread and learnings are also more wide. Basically, at the start, put small ticket cheques in more businesses
E) Focus — Put money directly in industries/businesses you understand and would be willing to help in, rest through syndicates /experts.
F) Track — it’s important to keep a tab on progress and guide wherever you can.
G) Make time — It is always good to block ‘proper’ (once a month / week etc) time to help the founders.
Pro Tip — having boundaries also helps a lot in finding peace in angel investing, expectations get aligned! Park only that money that you don’t mind losing (remeber its a — risk asset class), so that you dont have hard feelings about the businesses which wrap up (sometimes despite getting everything right, things dont work! If you have provisioned this right at the start, you wont blame the founder, instead see this as your legit ‘paying it forward’ — you helped someone try an idea which could have changed the world!)
Conclusion
Having said that — the most important ELEMENT to get right in all of this is still the founder :)
If the founder is good, half the battle is won, you can then look at the opportunity size / other factors. In fact, I believe, the term ‘angel investing’ should be changed to ‘founder investing’ as angel investors are only putting money into the founders and founders’ idea of a business.
Happy investing :)
