Thinking about becoming an angel investor? Here are some of the dos and don'ts

I have been a witness to the IPO journey of India’s two unicorns – Naukri.com and Zomato. Naukri, because I started working with them way back in 2000 when it was at an ARR of just Rs 20 lakh (FY20 revenue: Rs. 1,360 crore). In 2010 I was heading corporate development at Info Edge and invested in Zomato, when it was in its infancy.

Along the way, I invested in other startups (Jaypore, Cashify, Nivesh, LetsVenture, etc), some successful and others not. These associations have provided me with a clear perspective of the important ingredients required for a startup to scale and be successful.

It will be my pleasure to share some of those learnings with fellow angel investors. I must add that angel investing, done in the right way, can really help in wealth creation over the long term.

The first important step for any angel investor is to have a clear worldview of how things will shape up over the next 10-15 years.

A clear perspective of what kind of businesses will be required in future will help bring clarity in terms of business to invest in. If one can identify winners of tomorrow, then the probability of success will be very high.

There are four stages through which a start-up evolves – ideation, proof of concept, market fit, and growth. Any angel investor needs to understand the stage of a startup that they are looking to invest in. The right stage to get into a startup is when there are early signs of market fit being achieved. That is when customers start loving the product and are finding value in using it.

The next most important factor is the ability of the founding team to execute. It should be possible for the startup to scale and grow. I would avoid investing in a company that is in a niche business, even though very profitable.

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Network effect and the ability to consistently grow over a long period are also important requirements. Startups have a long journey to cover when they start.

The journey will only be successful if the startup can maintain a decent pace all along. The network effect also enables the startup to grow consistently over a larger base.

I also like to work closely with the founding team with regular interactions, and help them with mentorship and connections. Once I’m convinced about a startup and its founders, I like to back them up fully. I also like to keep investing in all rounds until Series A, so that I retain a meaningful stake as the startup starts growing rapidly.

To explain the above, I can illustrate an example of Nivesh.com, where I invested in the very first year of their operations in 2017. They had launched the product a few months back and were showing month-on-month growth with very good reviews from their customers.

The product was targeted at people in the middle-income category and Tier-II /III towns, a potential of about nine million households. Anurag had demonstrated an entrepreneurial mindset with a couple of successful past exists. For me, it checked all the boxes, and I decided to invest at the very first instance.

Since then, I have continued to increase my stake as the company kept achieving more and more milestones. Because of the network effect, it has grown more than 100 times in the last four years. I am convinced that it is on its way to growing 100 times further from here in the next four to five years. That will be 10,000 times growth over less than 10 years for me!

In terms of what to avoid, I don’t like the businesses where there is too much competition or it is a me-too business, just trying to copy some idea. Again, these are relative measures, so one should be able to understand the situation of that particular industry.

In a very large market, even a small share could be significant. For me, it is important to understand whether it is a small market dominated by a few large players or vice versa.

I would prefer a situation where a small percentage of market share can also result in a sizeable size of business. I also like to avoid lifestyle businesses, as they find it difficult to become very large.

I also look at high founders holding during the initial stages. If founders have diluted a significant amount to other investors during the early stage, then it is going to be difficult for them to be raising money later on. I would also advise not to go with short term hypes and look for businesses that are built for the long haul.