Angel Investing 101: Prudently Giving Your Capital in India
Everyone has their peculiar style of asking questions and investigating. My little experience coupled with lots of observation tells me that the "one size fits all" strategy does not work when it comes to angel investing but nonetheless, most investors follow a pattern and build a knack for certain sectors and a signature style for evaluating startups over time.
With plethora of startups coming up in India, it is unusually difficult and easy at the same time to choose and invest. Easy, if one does not complete the due-diligence as one's table will be inundated with some great ideas all the time and difficult because if one does too much due-diligence, there are very less that will survive the ravages of that background check. From my innumerable chats with startup employees/No. X Employee ( 1 < X < 10) in India, the aroma outside is not always consequential to the great food being cooked inside. From outside, one might see big projected revenues, huge directly addressable market size figures, competitive advantages and media focus whereas insider employees might be waiting to walk over to another big idea because of the impending death of the startup. From outside, the founders may have been featured on the Young Turks, Forbes and several other magazines with words like Harvard, Stanford, Yale, Wharton looming somewhere in some para about their background but the very nature of startups makes them so risky that I would not trust the pedigree anyday. (Pedigree is good but I will not give you mine or my investor's hard earned $1M for the $1M you spent on that degree. Certainly impressive in social situations and little bit here and there, but when it means business, it means business).
So, how do you go about giving the money after you have done the usual abcd of due-diligence and number crunching. What more?
So, how does the investor know that the entrepreneur is committed to the idea? Committed to building a great workplace? Committed to changing and re-aligning his/her goals with the changed nature of market/competition? Committed to a great work ethic and not leaving his/her team in dark after raising the money? My suggestion to handle this ambiguity would be to do an onsite due-diligence lasting approximately 4-5 weeks in which a member of the VC Fund visits the startup and learns about the operations and how they are run. In this way, the VC Fund learns about the minute everyday difficulties facing the business which were not explicitly mentioned in the pitch deck. The fund will get to understand the work ethic of the team and their commitment and their drive to make the idea work. It might be easy for a chiseled ex-McK Consultant/GS Banker to fake enthusiasm and drive in a 2 hour long VC presentation but almost impossible to change the ground realities when the VC Fund is making an attempt to understand the business operations minutely. I know this sounds excessively forensic but the very nature of the Indian market calls for desperate measures. It was not long back when some Indian startup founders had siphoned off funds for personal projects within the startup digressing from the intended path, opened baby companies off the startup and other embezzlements cheating the naive investors. The expenses of such due-diligence might be high but definitely worthwhile for the funds who want to be dead sure about the business ethics of the startup they are going to include in their portfolio.
One more thing that should be done is the extensive background check of the team. The investor should reach out to his network and extended network to see who has the slightest connection with the entrepreneur he is trying to fund. As cheesy as it sounds, with investing, I bet that a Sherlock streak would be better than the all number-crunching Aryabhatta streak. Spotting a unicorn here and there, once or twice, is definitely great and life changing as an angel investor but to actually fund entrepreneurs with world changing ideas every single time with confidence requires more than just number crunching, backing of gut and astute judgement based on a couple of meetings.