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With the recent startup boom and the maturing ecosystem, angel investing went mainstream.
The crazy valuations in the last two years led to thousands of startups being funded. All kinds of things were happening because it was an unprecedented bull market, especially in 2021.
Now things are becoming more rational. Do you think angel investing will still continue to thrive?
The Finance Story caught up with Jaideep Mehta, who has been an angel investor since 2012, to understand how he got into angel investing and what future angels should consider when getting into the same.
Here are the excerpts from the interview.
Take us through the early days – How did you get into Angel Investing? What was your first investment?
Fortunately, my career started in the mid-’90s, right when our beloved internet was created with many world-changing tech advancements.
I was naturally pulled into the world of technology and over the years I held various leadership positions in tech-first companies. It’s one of the reasons why I look at investing, more through the lens of tech, rather than finance.
Honestly, I didn’t become an Angel Investor by design. I first dipped my toes into the world of investment because of a relative. He had come to me with an idea, which was on the lines of those maths prep startups.
At first, I wasn’t ready, but I immediately cut a check for him when he told me the business idea.
My first investment turned out to be pretty successful; Amazon bought the company four years later and I got a nice exit.
It inspired me to reinvest those returns in other start-ups.
I genuinely wanted to help startups through my expertise and experience.
Later in my research cockpit at IDC (International Data Corporation), I saw the startup revolution coming in 2012.
I decided to join the Indian Angel Network (IAN) to build my presence in the new ecosystem. IAN is a highly ethical and very successful consortium having several successful startups in its portfolio.
Whilst I was in an amazing role at HT Media, the gravitational pull towards the investment world ultimately prevailed.
After 20 years of corporate life, in April 2022, I made the switch to follow my passion as the Managing Partner at IAN.
How do you evaluate and gauge startups you want to invest in as an angel?
My evaluation process is more around the vision and execution capability of the Founder(s), as simple as this.
Founders and their attitudes play a very important role when I am making early-stage investments. If the founder makes a flippant remark with respect to ethics, it’s a red flag. This shows that their ethical values could falter when things get tough, which is a big turnoff for me.
The second big turnoff for me is if I perceive a founder to be close-minded. The “My way or highway. This is my business and you don’t understand it as well as I do.” kind of attitude. A rigid mindset is the enemy of a successful start-up.
I certainly think about profitability, and invest in companies that can reap dividends three to five years down the line. It’s my hard-earned money after all, and I can’t risk it.
I take a portfolio approach, acknowledging that a certain percentage of ventures will fail, keeping me humble.
And let me tell you that I don’t focus on hot startups, and don’t condone the same. Not every startup is going to become a unicorn. And you shouldn’t worry about it either.
Think about whether they can help the environment, educate some people, or provide jobs or not. Back great Founders. You will experience the joy of watching a great company flourish and make money in the process.
In your years of investing any instances where you thought it would be a good investment, but it turned out to be a total flop?
I’ve had my share of flameouts, just like any other angel investor.
For instance, there was a founder, building a business providing marketing services to the Salon and Spa industry. It was a very solid business model.
So I thought “What could possibly go wrong?”
We underestimated the degree of ethical challenges that could rise in the spa business in India, and ultimately the business had to be shut down. We had to write off our investment.
This is what I call a real business model risk.
There is another very interesting lesson that I learned from my investment mistakes; underestimating the competitors of the company that I am investing in.
I had once invested in the used car space. Their main competitor saw this company’s potential and used some very aggressive business tactics to outrun this company.
They had a perfectly good business model, but it got trampled over by a less efficient, but heavily funded competitor.
However, a more common risk that arises is the execution risk.
As an investor, I made a wrong judgment about that founder’s execution capabilities.
The business model was good but the founder was unable to get the job done and the business toppled.
If it doesn’t work out for us, we just have to shrug our shoulders, because that’s what angel investors do.
This is my message to all investors; every failure should teach you a lesson.
If you didn’t spot a red flag while you were cutting the check, you should learn from it and apply it in your investment process.
Your career started when the internet was invented and now we are in the world of Web3. What has been your visibility in all the phases?
I have gone through the dot-com crash, Web 2, and now have come the era of Web3.
A lot has changed. But do you know what hasn’t changed? And dare I say, will not change during our lifetime? It is the principle of investing.
It’s about businesses delivering value to their customers, the wider society, shareholders, and their employees.
So while technology may change, new types of business models become possible with new technology, but the fundamentals of business don’t change.
Business models still remain top line and bottom line. The ability to execute still remains the ability to execute, and the ability for someone to build a large organization and scale remains exactly the same.
Ethics and integrity don’t change.
Any tips on investing as an angel investor? What advice would you give to other angel investors?
Long-term investors including myself, have actually doubled down on our investments, in spite of the so-called funding winter. But the people who had joined in the last 18 months they’ve all fled. That is because a lot of them didn’t really understand the asset class.
Here are some of the key aspects which every investor should consider before spending their hard-earned money:
Startup investing is a unique asset class: It’s not like buying a thousand shares of HUL or ICICI Bank and then just putting them inside your cover. You should be in a position where you genuinely want to help the entrepreneur. If you are okay to tie up liquidity for six or seven years, and don’t expect to see any dividends, you might consider it.
Invest at your own risk: My friends and family members sometimes say to me “Where will you invest next? Let us know then we’ll also invest there.” I actively discourage that type of approach. Also, invest only the amount you can afford to lose without it changing the orbit of your life.
Don’t overestimate: Thinking that you’ll invest in five companies and four companies will be successful is foolish. Keep in mind that investing in early-stage start-ups is very risky.
Be patient: Great investments yield great results over a decade, be patient. Unless there is an earth-shattering reason to do so, don’t bank an early exit in a company that you feel will be a winner.
Reflect: When the company we’ve invested in becomes a catch, we don’t pause to think “What went right?”. So you need to take note of that as well.
What should founders keep in mind if they want to raise money from angel investors? What are some huge turnoffs with regard to founders in your opinion?
- You need to have a real business model that can generate profitability.
- You have to have great execution capabilities.
- I have made some successful investments through IAN in startups, that didn’t have IIT or IIM founders. So, don’t be shy if you are not an IITian.
- Make sure that your startup is making the world a better place, by reducing carbon footprints, creating more job opportunities, etc.
- Many founders feel that they need to be proficient in English while pitching to investors. Mr. Ambani couldn’t speak very good English, right? But then he built empires, which today account for a significant percentage of GDP. Don’t worry if you don’t speak fluent English.
- Last but not least, choose your Angels carefully. Look for investors who can add value beyond the cash.
Lastly, what kind of startups do you invest in? What are your views on Web 3 and its skyrocketing valuations that preceded it?
I largely focus my investments on deep technology or enterprise technology startups as this is the area that I understand best.
B2B Saas companies, AI companies, and IOT companies come under these categories.
Lately, I have been looking for interesting companies in the broad Electric Mobility and Cleantech spaces, and I’m hopefully zeroing in on one or two.
I don’t have a single web 3.0 tech company in my portfolio. However, I’m looking at two or three very interesting players, which I believe can build businesses along sound lines.
I’m able to now talk to them at sensible valuation numbers, which were missing by and large last year.
I massively didn’t fall victim to the crypto rush. I counseled a lot of friends, and their kids, to not burn their fingers and dabble. It was just a speculative frenzy.
But does blockchain technology and associated cryptocurrency technology have a big future in the context of human civilization, I would say absolutely. And millions and billions will be made. But the question is, do you have the ability to back the right founder?
With Web3 coming in, it’s important as an investor to be able to separate the wheat from the chaff.
Identify the folks who are building companies based on old-fashioned principles, and invest in those entrepreneurs who can execute well.
