Tag Archives: angel investing

Controversial: “Many entrepreneurs take plenty of risks—but those are generally the failed entrepreneurs, not the success stories.”

I am reading a book Originals – How non conformists move the world. It is about folks that challenge the norm. In it, the author quotes from Malcolm Gladwell

“Many entrepreneurs take plenty of risks—but those are generally the failed entrepreneurs, not the success stories.”

This is not new and very controversial at the same time. He mentions multiple examples of highly successful entrepreneurs from the founders of Warby Parker to Bill Gates, as folks who had a side-gig in their venture before they plunged into something.

On the other hand, my experience has always been that when you commit to anything full-time you get a lot more success, as I have seen in my own case.

I am curious, how many of you are doing a side-gig or a project that you hope someday turns into a full-time opportunity or startup?

I’d love to also hear if you think that committing full-time versus doing it on the side will get you to your goal.

As an investor I never invest in any entrepreneur that’s seeking investment for an opportunity they are doing part-time. Should I be changing that perspective?

Before and after an angel investment; stories about why angels are once bitten, twice shy

Outside of Silicon Valley it is extremely hard to raise any financing for a startup. It is not unusual to hear about a $250K – $500K round taking more than 2 or 3 months to close. If the entrepreneur is a first-time founder, without any pedigree (top tier school, well known previous employer) expect it to take longer. In fact according to the data shared by Mar Hershenson (slides below) angels now are not investing until you have some traction.

There are many reasons why angels take so long to invest and insist on multiple meetings, due diligence and more data before they invest relatively small sum of money such as $25K – $50K. Besides the usual reasons such as “hard-earned money”,  “better investment options elsewhere”, etc. there is one issue that rarely gets discussed outside closed rooms or in private messages.

The lack of information sharing by entrepreneurs once a round is closed.

I dont think it has anything to do with if the company is doing well or not. Some entrepreneurs just don’t keep their investors in the loop – writing that off as “busy work”, “don’t have time – building the business, gaining customers”, etc.

Looking at my investments alone, 3 of the companies have founders who were referred to me by friends have founders in this bucket. Before my investment, I would get an email or WhatsApp message every 2-3 days with a request for follow-up meetings. One of them was very persistent, following up with me for 5 months before my investment.

After the investment however, radio silence. Now, I have to reach out to them every 6 months or a year to find out how they are doing. While previously I would get a response to an email in a day, now 50% of emails are not being responded to.

To be honest, I understand that entrepreneurs are busy. Unlike VCs who have information rights and have an ongoing cadence with the CEO as part of the board, angels rarely do. Angel investments are mostly passive, with a promise to help with “network” and “connections”. In many cases these are marginally relevant to the entrepreneur.

I have however now developed a new set of checks to ensure I don’t go down the path of an incommunicado entrepreneur.

I ask to be sent their weekly / monthly update to investors or the team for 2 months. The quality, timeliness and consistency of the emails gives me a clear indication about if the entrepreneur is even going to keep others in the know or in the dark.

This is only one of several checks but, if you are an entrepreneur, having a frequent (monthly) update on highlights, low-lights and insights about your business, key milestones and next steps helps you and the investors find ways to help you.

What criteria should you use to create a target list of angel investors?

As a follow up to what percentage of active angel investors are on #angelList, I thought I’d address the orthogonal question. The follow up is to help entrepreneurs figure out how to come up with the list of criteria to create their target list of 20-50 angel investors for their #NapkinStage startup.

There are 5 primary criteria I use to help entrepreneurs find the right target investors.

1. Location. 2. Company Stage. 3. Space (Market). and 4. Raise Amount. 5. Network.

Target Angel Investor List Criteria
Target Angel Investor List Criteria

1. Location. All angel investing is largely bound by “what do we have in common”. Many angel investors prefer to invest in areas they have expertise in, in entrepreneurs they know and in their “own backyard”. There are a few exceptions (many Indian angel investors in the US, like to invest in companies in India), but angel investing is largely a “city specific” opportunity. If you can find the top entrepreneurs and high net worth individuals in your city or expats who are from your city but have left to go abroad, who you know, that would be a good place to start.

2. Company Stage: The further along you are from the #NapkinStage (yes, I know the irony in this criteria) but not so far along to be expensive, is when angel investor like to invest. I am going to put some simple stages – Idea (#NapkinStage) (or concept stage) – when you are formulating the problem with your cofounder, then the #PrototypeStage, then #CustomerPilot stage, followed by #MVP, and then the #TractionStage and finally #RevenueStage.

Most entrepreneurs need investors at the #NapkinStage through the #TractionStage, but most angel investors prefer to only invest at the #RevenueStage. The number of purely Idea stage investors is fairly small – limited to your network, since this used to be a Friends and family round.

Most entrepreneurs also like to join an accelerator at the #NapkinStage as well, but most accelerators prefer to take companies at the #Prototype or the #CustomerPilot stage.

3. Space. (Market): This would be the most obvious, but I am surprised by the number of entrepreneurs who reach out to folks who have been in B2B all their lives with a consumer internet opportunity. While, there are exceptions when folks who like to invest in areas outside their expertise, most angel investors I know tend to “stick to their knitting”, since they like to add value beyond the money.

4. Raise Amount: Depending on the amount of money you are trying to raise, you might want to create a target list of 20 to 50 investors. The average angel investor puts between $5000 to $50K per company. There are exceptions, of course, with some angel investors putting as little as $1000 and a few also putting up to $250K. If, you are looking to raise between $250K to $1 Million you want to target between 20 to 50 angel investors, which is the right number of early targets to get about 5-10 investors signed up.

5. Network: This is probably the most important and sometimes the only criteria needed. If you can dig your well before you are thirsty, it makes it easy to raise money faster. The first place I’d start to build my target investor list is the people in your network, who you have worked with before and those that know you well.

Who should you raise money for your #startup from if you had a choice?

I got a question from a friend Abhinav Sahai, as a follow up to my post “Does who you raise money from limit or grow the size of your ambition?”

What are the parameters that one should look at when choosing ‘who’ to raise money from? 

I am going to give you the easy answer first to the question. This is based on my observation that most entrepreneurs find it extremely hard to raise money for any number of reasons – positioning, not being in the network, not having sufficient traction, etc.

The answer is “Whoever is willing to give it to you”.

For over 80% of entrepreneurs that answer should be sufficient, unfortunately.

Lets assume though that you are in a position to receive interest from multiple investors and you have to make a choice. Or you are going about your fund raise in a strategic fashion and are looking to target specific investors who you’d like to bring on board at your startup.

The overarching theme to address this question is to bring folks who provide “Smart Capital“.

Most investors will give you money. That’s why they are an investor.

What you need in addition to the capital is what you should be looking to get from investors if you have the choice.

1. In some cases that might be connections and networks – to other investors, to potential customers, partners or future employees.

2. In other cases it might be expertise and insights – how to address questions that you will face while you scale and grow your startup.

3. In still other cases it  might be credibility and advice – being associated with top folks in your industry gives you a leg up over others.

4. In still other cases you might just want someone you can trust and sound ideas off. Knowing that your startup journey is going to be long and lonely means you need folks to help keep your morale up or to help you gain perspective.

They may be more things you might need in addition to capital, but most will fall into these 3-4 buckets.

Typically most folks will tell you that they can bring their expertise and connections. 

If you can be strategic about your fund raising (meaning you have good runway, or have great traction), then I’d highly recommend you look at your fundraising as a project that the CEO undertakes herself.

It will take about 3-6 months (elapsed time) from start to finish, so you should be willing to be patient, and consistently follow up as with any strategic project.

So the question then becomes how do you gauge if someone has expertise or connections?

The simple test is to ask them questions you face daily and look for depth of the answers, the breadth of their knowledge and the ability for them to customize their learning to your needs. That will give you a sense for their expertise.

The depth and breadth of their network is also easy to test – ask them to introduce you to 2-3 people you have been trying to meet to help validate your plan.

Above all I’d highly recommend you reference check. Talk to others in their network who they have invested with or other entrepreneurs they have invested in to get a sense for the investor.

The most critical question you can ask is how they respond to tough situations. 

100% of all startups go to hell and back before they are a success or a failure. When you have supportive investors to help you along the hard journey, it will be a lot less stressful.

The step function of #changes that are happening in the #Indian #startup scene

Most everyone believes that startup growth happens in step functions. You work for ages on something and it seems like there is little progress, but as an entrepreneur you are plugging away at it and suddenly one day, the growth is dramatic. Then it plateaus for a while and grows again. That’s the same for startup ecosystems is my opinion (not researched).

Step Function Growth
Step Function Growth

I am starting to see the next step function of growth in the Indian technology startup scene. There are a lot of people (entrepreneurs, investors, etc.) contributing to this growth and its hard to point to why it happened except in hindsight.

First, what metrics should we track so we can really know if there’s a step function or no progress?

Here are a few that we track at the Accelerator.

1. # of startups: How many startups are getting formed, where are they getting started, etc.

2. # of funded startups: Time taken to fund startups, amount of investment into startups, stage the companies are in at the point of angel investment etc.

3. Pace of growth: How quickly are they signing customers, how quickly are they getting VC investment, how quickly is their revenue growing, etc.

The NASSCOM 10K startups initiative is one such forcing function contributing to the growth.

Yesterday in partnership with NextBigWhat they organized the first of several #startuproots event.

A big part of that event was the #sharktank, which had 4 companies out of 200 that applied, that were going to pitch to investors and they had to make a decision on the spot.

For those of you who are not familiar with the sharktank format, the startups get 5-10 minutes to pitch, the investors get 5-10 min to ask questions and 2-5 min to make an offer. The entrepreneurs can then take some time to make their decision and then make a counter offer.

All offers are binding, save for legal and financial due diligence. Which means if and investor gets cold feet later, they cannot back out.

Yesterday, 4 companies presented. I had heard about 2 of those companies before (but did not know they were chosen) and the other two companies were fresh and new.

There were 8 investors who were part of the sharktank, but only 6 were serious. The other 2 seemed more there to critique and provide theoretical knowledge about startups.

Pankaj Jain from 500 startups, Ravi Gururaj from HBS, Ranjan Anandan from Google, Anirudh Suri from India Internet Fund and RK Shah from HBS were on the investors side.

Tookitaki (ad-tech space), Moojic (retail music hardware), Credii (Mid-market IT decision support) and Lumos (solar panels for backpacks to charge your phone), were the presenting companies.

All four got funded at the end of the event. I personally thought 2 of them would definitely get funded, but all 4 getting offers was truly a step function change.

I was personally pleased that Lumos got funded. They are doing something new and innovative that most Indian entrepreneurs wont do – Working on a non-software, difficult to scale hardware business, because of their passion.

I have to call out a special mention to RK Shah. RK is not a technology entrepreneur, (he runs a textile unit) neither is he a professional institutional investor. He wrote 2 checks himself yesterday. We need more RK Shah’s in India.

Finally big kudos to Jaivir, Brijesh and the rest of the NASSCOM 10K startup team. In less than 1 week, they got 850 signups for the event, and 500+ people attending.